What is the impact of risk retention on insurance costs?

• A. It generally increases premium costs
• B. It allows for potential savings on insurance premiums
• C. It has no effect on premium levels
• D. It only applies to commercial insurance

Answer: (B)

Risk retention refers to the practice of an individual or organization choosing to bear a portion of their own risk rather than transferring that risk entirely to an insurance company. When a policyholder retains a higher level of risk—through higher deductibles, for instance—they are typically acknowledging that they will cover certain losses themselves. This practice can lead to potential savings on insurance premiums because insurance companies often reward policyholders who are willing to take on more risk with lower premium rates. By doing so, the insurer can minimize its own risk exposure and reduce administrative costs associated with smaller claims, ultimately allowing for a more efficient pricing of policies.

Additionally, retaining some risk encourages policyholders to be more cautious and responsible in risk management, further contributing to potential reductions in claims costs for insurers. Thus, organizations or individuals who effectively manage their retained risks might see significant savings on their insurance premiums, making the option of risk retention an economically beneficial strategy in many circumstances.