Which statement is correct with respect to retention's ability to meet risk financing goals?

Which statement is correct with respect to retention's ability to meet risk financing goals?

• A. Retention exposes an organization to less variability in cash flows than transfer.
• B. Retention enables an organization to manage its cost of risk.
• C. Retention is the most effective way to meet the risk financing goal of paying losses.
• D. Retention generally reduces the level of liquidity needed.

Answer: (B)

Understanding retention in risk financing: it lets an organization pay some losses from its own funds rather than transferring that risk to an insurer. Because of this, management can shape the overall cost of risk by deciding how much loss to retain and how to fund those losses—through internal resources, captives, or deductibles combined with loss-control programs. This flexibility means retention can be used to manage the cost of risk, balancing expected loss costs, funding needs, and any potential savings from avoided insurance premiums. Retention does not typically reduce cash-flow variability; in fact, it often increases it because losses are uncertain and must be funded from internal resources, which can swing financial results. It is not the most reliable way to ensure losses are paid promptly, since paying losses quickly depends on having sufficient liquidity; transferring risk or using hybrids can provide more stable payment timing. And retention generally does not reduce liquidity needs; it tends to require higher liquidity to cover potential losses.

Understanding retention in risk financing: it lets an organization pay some losses from its own funds rather than transferring that risk to an insurer. Because of this, management can shape the overall cost of risk by deciding how much loss to retain and how to fund those losses—through internal resources, captives, or deductibles combined with loss-control programs. This flexibility means retention can be used to manage the cost of risk, balancing expected loss costs, funding needs, and any potential savings from avoided insurance premiums.

Retention does not typically reduce cash-flow variability; in fact, it often increases it because losses are uncertain and must be funded from internal resources, which can swing financial results. It is not the most reliable way to ensure losses are paid promptly, since paying losses quickly depends on having sufficient liquidity; transferring risk or using hybrids can provide more stable payment timing. And retention generally does not reduce liquidity needs; it tends to require higher liquidity to cover potential losses.