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Question

Difficulty: EasyMethods of Handling Risk

To lower the premium on his new auto insurance policy, David chooses a 1,000deductibleinsteadofa1,000 deductible instead of a 250 deductible. By accepting the responsibility to pay the first $1,000 of any covered accident out of his own pocket, which method of handling risk is David primarily demonstrating for that specific amount?

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

Answer

Risk retention
The correct answer is risk retention because a deductible represents a deliberate choice by the insured to assume financial responsibility for an initial portion of a loss before the insurance company's coverage applies.

Step-by-Step Solution

1
Analyze the specific action taken by the individual in the scenario.
David is choosing to pay the first $1,000 of a loss out of his own pocket.
Identifying who bears the direct financial burden helps determine the correct risk handling method.
2
Compare the action to the STARR methods (Sharing, Transfer, Avoidance, Reduction, Retention).
Assuming financial responsibility for a specific portion of a loss matches the definition of risk retention.
Differentiating between the overall policy (transfer) and the specific function of the deductible (retention) isolates the core concept being tested.

Key Concept

Methods of Handling Risk (STARR)
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Topics

Methods of Handling Risk

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