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Difficulty: MediumMethods of Handling Risk

Elena, a coastal property owner, recently reviewed her homeowners insurance policy to address the financial threat of hurricanes. Rather than paying a high premium for standard coverage, she chooses to add a policy endorsement that increases her windstorm deductible from 1,000to1,000 to 10,000. By choosing to pay a significantly larger portion of any future windstorm claim out-of-pocket, which method of handling risk is Elena primarily demonstrating?

  1. A
    Risk reduction
  2. B
    Risk transfer
  3. Risk retentionAnswer
  4. D
    Risk avoidance

Answer

Risk retention
Risk retention involves assuming the financial responsibility for certain losses. By increasing her deductible from 1,000to1,000 to 10,000, Elena is choosing to self-insure or 'retain' a much larger portion of the risk in the event of a hurricane. Deductibles are a classic example of risk retention.

Step-by-Step Solution

1
Analyze the specific action taken by the property owner in the scenario.
Elena increased her deductible, meaning she will pay a much larger amount out-of-pocket if a loss occurs.
Identifying the financial impact of the decision determines which risk management method is being utilized.
2
Evaluate how increasing a deductible aligns with the fundamental STARR methods (Sharing, Transfer, Avoidance, Reduction, Retention).
By accepting a larger deductible, Elena is choosing to self-insure a significant portion of the potential financial loss, which falls squarely under Retention.
Deductibles and self-insurance are the primary mechanisms for retaining risk in insurance contracts.

Key Concept

Methods of Handling Risk
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Topics

Methods of Handling Risk

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