Question 22

Loss retention is ineffective when the probability of loss is unknown.

Loss retention is a viable risk management strategy when certain conditions are met, but if the probability of loss is unknown, it becomes problematic. Without a clear understanding of the likelihood of losses, an organization cannot effectively determine whether retaining risk is prudent.

A) losses are highly predictable.

This option correctly identifies a condition that supports loss retention. When losses are highly predictable, an organization can plan for and manage those losses effectively, making loss retention a sound strategy.

B) probability of loss is unknown.

This is the correct answer, as unknown probabilities undermine the effectiveness of loss retention. If an organization cannot ascertain the likelihood of a loss occurring, it cannot make informed decisions about whether to retain or transfer that risk.

C) worst possible loss is not serious.

This option supports loss retention, as organizations may choose to retain losses that are deemed manageable or not severe. When the worst-case scenario is considered acceptable, loss retention is a rational approach.

D) insured chooses to assume the losses involved.

This statement aligns with the concept of loss retention, as it emphasizes the choice of the insured to take on the risk. When an insured party willingly accepts the potential for loss, it indicates a strategy of loss retention.

Conclusion

The correct answer highlights a critical flaw in the loss retention strategy, as the unknown probability of loss makes it difficult to manage risk effectively. In contrast, the other options demonstrate conditions that support loss retention, making them less applicable. Thus, without a clear understanding of loss probability, organizations cannot confidently engage in loss retention.