General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
A small business decides to absorb minor equipment repairs out of pocket but buys commercial insurance for any single loss above $5,000. This plan combines which two risk management techniques?
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Answer & full 3-part explanation (select an option above, or peek)
Why D is correct
Retention means keeping the risk and paying for losses out of pocket — here, the first $5,000 of any loss. Transfer means shifting the financial consequences to an insurer through a policy — here, amounts above $5,000. Risk management commonly layers these techniques: self-insure small, frequent losses and insure large, severe losses. Avoidance (not engaging in the activity), sharing (dividing risk among a group), and reduction (loss prevention) do not describe this split.
Why the other options are wrong
- A) Avoidance means not engaging in the loss-producing activity at all; sharing spreads losses among participants rather than retaining and transferring.
- B) Reduction lowers the frequency or severity of loss but does not describe keeping small losses while insuring large ones.
- C) Transfer is present, but the business also retains the first $5,000, so transfer alone is an incomplete description.
Memory hook
Keep the small, insure the large: that is retention + transfer working together.