Life & Health Insurance Practice Exam 2026 - Free Practice Questions and Study Guide

The concept being referred to is risk retention, which occurs when an individual or organization decides to accept the possibility of a loss associated with a risk rather than transferring that risk to an insurance company or through other means. This approach involves recognizing that certain risks are manageable and may be better handled internally, and it could be because the potential loss is deemed acceptable or affordable.

In risk retention, entities may choose to cover costs directly when a loss occurs, rather than paying premiums for insurance coverage. This decision often reflects a calculated assessment of the likelihood and potential impact of the risk, coupled with the financial ability to absorb the loss if it occurs.

Risk avoidance, on the other hand, involves taking steps to completely eliminate the possibility of facing a loss, which is different from accepting the risk. Risk management encompasses a broader framework that includes identifying, assessing, and prioritizing risks, and can incorporate both retention and transfer strategies. Risk transfer, meanwhile, is explicitly about shifting the burden of risk to another party, such as through the purchase of insurance, which is also contrary to the definition provided for risk retention.

So, within the context of this question, risk retention is the appropriate term for choosing to accept the risk of potential loss rather than transferring that risk elsewhere