Which statement best describes Passive Retention?

Which statement best describes Passive Retention?

• A. Unaware you are engaging in retention usually the result of underestimation of risk or the failure to properly ID the loss exposure
• B. Deliberate decision to practice retention
• C. Firmly set aside funds every period to pay for losses that are predictable and high severity
• D. No separate fund to pay for losses, you pay as losses occur

Answer: (A)

Passive retention happens when a company retains risk without realizing that it’s doing so. The defining idea is unawareness due to underestimating the risk or not properly identifying the loss exposure. Because there’s no conscious plan to retain the risk, losses are simply absorbed as they occur. The statement that best describes this captures that lack of awareness and the failure to identify the exposure. The other scenarios reflect more deliberate or planned forms of retention: choosing to retain risk on purpose, setting aside funds to cover expected losses (funded retention), or paying losses as they occur without a separate fund (unfunded but still a result of an intentional plan to absorb losses).

Passive retention happens when a company retains risk without realizing that it’s doing so. The defining idea is unawareness due to underestimating the risk or not properly identifying the loss exposure. Because there’s no conscious plan to retain the risk, losses are simply absorbed as they occur. The statement that best describes this captures that lack of awareness and the failure to identify the exposure.

The other scenarios reflect more deliberate or planned forms of retention: choosing to retain risk on purpose, setting aside funds to cover expected losses (funded retention), or paying losses as they occur without a separate fund (unfunded but still a result of an intentional plan to absorb losses).