Question

Which of the following is the form of risk if an entity chooses to set aside funds to be self-insuring?

a) Risk retention
b) Risk avoidance
c) Risk transfer
d) Risk mitigation

Answer 1

When an entity sets funds aside for self-insuring, it engages in risk retention, holding responsibility for potential losses instead of transferring the risk to insurance.

Step-by-step explanation:

When an entity chooses to set aside funds to be self-insuring, it is practicing risk retention. This means that the entity accepts and holds responsibility for the loss or damage that might occur from a certain risk, instead of transferring that risk to an insurance company.

Instead of paying premiums to an insurer, the entity allocates its own capital to cover potential future losses. Risk avoidance would mean not engaging in activities that produce risk, risk transfer involves passing risk to another party, often an insurance company, through purchasing insurance policies, and risk mitigation refers to strategies employed to reduce the impact of a risk.