A business owner decides to set aside funds to cover a small, expected property loss rather than buying insurance for it. This risk management technique is called:

Why A is correct

Retention (also called assumption) means the risk is kept by the individual or business, often for small or predictable losses where insurance would be uneconomical. Self-insurance and high deductibles are common forms of retention. Transfer shifts the financial consequences of a loss to an insurer in exchange for a premium. Avoidance means not engaging in the loss-producing activity at all, and reduction (loss control) lowers the frequency or severity of losses without eliminating the exposure entirely.

Why the other options are wrong

• B) Transfer moves the risk to an insurer through a policy; here the business keeps the exposure and funds it internally.
• C) Avoidance would mean abandoning the activity that creates the loss exposure, which is not what setting aside funds does.
• D) Reduction is loss prevention or mitigation that lowers the chance or size of a loss, not the self-funding of losses.

Memory hook

Retention means self-funding, transfer means buying insurance, avoidance means not doing it.