Insurance Broker Certification Practice Exam

What is meant by retention in insurance terms?

1. Giving up on a potential claim to minimize risk

2. The planned assumption of risk by an insured

3. Transferring the risk to another party

4. Eliminating exposure to specific losses

The correct answer is: The planned assumption of risk by an insured

Retention in insurance refers specifically to the planned assumption of risk by an insured. This means that the insured deliberately chooses to take on certain risks rather than transferring them to an insurer. By doing so, they acknowledge their willingness to cover certain losses that may occur, which can help reduce insurance costs since the insured is assuming some of the financial responsibility instead of relying entirely on the insurance provider. This concept is fundamental in risk management, as it allows individuals or businesses to tailor their insurance coverage to match their specific risk tolerance levels and financial situations. By strategically determining which risks to retain, insured parties can maintain better control over how they manage and finance potential losses. Understanding retention is crucial for insurance professionals, as it influences both coverage recommendations and risk management strategies for clients. It is a key factor in developing an effective approach to minimize overall risk exposure while maintaining financial stability.