What is the main purpose of risk retention in the context of insurance?

• A. To eliminate all risks
• B. To self-insure against certain risks
• C. To transfer risk to another party
• D. To increase premium payments

Answer: (B)

Risk retention refers to an approach in the context of risk management and insurance where an individual or organization decides to absorb certain risks instead of transferring them to an insurance provider. This method can be a strategic decision based on the evaluation of the risks involved.

By choosing to self-insure against certain risks, the entity acknowledges that some risks can be managed internally, potentially saving on insurance premiums and creating a more tailored approach to risk management. This can be particularly advantageous for risks that are deemed to be manageable or for which the cost of insurance might exceed the potential loss. Organizations might retain risks that are low in probability or manageable in terms of financial impact, allowing them to focus on transferring other, more significant risks that require policy coverage.

In contrast, the other options do not align with the concept of risk retention. Eliminating all risks is typically unrealistic; transferring risk to another party is related to purchasing insurance; and increasing premium payments does not inherently relate to risk retention, as risk retention involves self-funding for some risks rather than relying solely on insurance solutions.