What does the term "risk retention" refer to?

The term "risk retention" specifically refers to managing risk internally instead of transferring it to an insurer. When an individual or organization chooses to retain risk, they are accepting the potential financial consequences of that risk rather than paying for insurance coverage to mitigate it. This approach can be strategic, especially when the cost of insurance may exceed the potential loss that could occur from the risk itself.

Risk retention is commonly seen in scenarios where the retained risk is manageable or when the entity feels confident in its ability to absorb losses. For instance, a business might decide not to insure certain minor liabilities because it believes that the potential losses are relatively low and affordable. By retaining the risk, they maintain full control over their risk management process and potentially save on insurance costs.

In contrast, other options involve methods of handling risk that do not align with the definition of risk retention. Transferring risk to another party (such as through insurance) indicates a desire to share or eliminate financial exposure, which is the opposite of retention. Minimizing risk through preventive measures focuses on reducing risk likelihood rather than retaining it, and denying risk to lower premiums does not reflect a legitimate risk management strategy. Thus, option B accurately captures the essence of risk retention within risk management practices.