Arizona Adjuster Practice Exam

What method of risk management is exemplified by a business setting up a self-insurance program?

1. Risk avoidance

2. Risk transfer

3. Risk retention

4. Risk reduction

The correct answer is: Risk retention

When a business establishes a self-insurance program, it is choosing to retain its own risk rather than transferring that risk to an insurance company. This means that the business acknowledges that it will be responsible for covering certain losses that may occur, rather than paying premiums to an insurer to manage those risks for them. By opting for self-insurance, the business is effectively absorbing the financial responsibility associated with those risks. This approach indicates a strategic decision where the business has evaluated its potential risks and has determined that it can manage and absorb these risks within its own financial framework. Therefore, self-insurance is a clear demonstration of risk retention, as the business is choosing to handle potential losses internally rather than shifting that burden to another party.