A business owner decides to accept the risk that a key employee may die rather than purchase life insurance on that employee. This approach to risk is best described as:

Why A is correct

Risk retention means the business keeps the financial risk of loss and absorbs it out of its own resources. Here the owner deliberately chooses not to insure, so the exposure is retained rather than transferred. Retention is one of the five risk management techniques, along with avoidance, sharing, reduction, and transfer. The decision is conscious and is typically appropriate for losses that would not threaten the financial stability of the business. Choosing to self-insure through retention does not eliminate the loss, it simply means the business bears it.

Why the other options are wrong

• B) Risk avoidance means eliminating the exposure entirely, for example by not employing the person at all; choosing not to insure does not remove the exposure, so this is incorrect.
• C) Risk transfer shifts the financial consequences to an insurer or another party, which is the opposite of what this owner did by declining coverage. A transfer would have occurred only if the owner had actually purchased coverage.
• D) Risk sharing pools the exposure with others, such as through a group arrangement or reinsurance; here the owner alone absorbs the potential loss. No pooling arrangement exists here, so sharing does not apply to this decision.

Memory hook

Keep the risk = retention. You are still exposed; you just did not buy the ticket.