Risk retention is generally better for which type of losses?

• A. Small risks
• B. Large catastrophic risks
• C. Uninsurable risks
• D. All risks

Answer: (A)

Risk retention involves choosing to absorb losses yourself rather than paying a premium to transfer the risk to an insurer. This approach makes the most sense when losses are small, frequent, and something you can financially withstand without threatening your overall stability. For small risks, the expected cost of self-insuring (like paying a deductible or paying out-of-pocket) is often lower than the insurer’s premium plus loading, so keeping the risk in-house saves money and avoids extra policy costs. In contrast, large catastrophic risks could bankrupt you if they occur, so transferring that risk to an insurer helps stabilize finances by pooling many such risks. While some risks may be uninsurable or not suitable for any transfer, the general principle is that retention is best for small, manageable losses.