All of the following are examples of risk retention EXCEPT:
A. Premiums B. Deductibles C. Copayments D. Self-insurance
The Correct Answer and Explanation is :
The correct answer is A. Premiums.
Explanation:
Risk retention refers to the strategy of managing risk by accepting the possibility of loss rather than transferring that risk to an insurance provider. In this context, the other options—deductibles, copayments, and self-insurance—are forms of risk retention.
- Deductibles: This is the amount a policyholder must pay out of pocket before their insurance coverage kicks in. By choosing a higher deductible, an individual retains more risk because they will have to absorb more of the costs associated with a claim before the insurance starts to pay. This reflects the principle of risk retention since the insured is responsible for part of the loss.
- Copayments: Similar to deductibles, copayments (or copays) are fixed amounts that the insured pays for specific services (e.g., doctor visits or prescription drugs) at the time of service. Although the insurance covers the rest of the cost, the copayment reflects an acceptance of partial financial responsibility, hence a retention of risk by the policyholder.
- Self-Insurance: This is a strategy where an individual or organization sets aside funds to cover potential losses instead of purchasing insurance. Self-insurance is a clear example of risk retention, as the individual or entity retains the risk by not transferring it to an insurer and instead prepares to absorb the losses.
On the other hand, premiums are payments made to an insurance company to obtain coverage. By paying premiums, policyholders transfer the risk of potential financial loss to the insurance provider. Thus, premiums represent a shift of risk rather than retention. The insured pays for the peace of mind that comes with knowing they are protected against certain losses, which contradicts the principle of risk retention.