Accounting Fundamentals Certification (AFC) Practice Test

Question: 1 / 400

What does increasing a deductible from $500 to $1500 represent in risk management?

Risk Prevention

Risk Transfer

Risk Retention

Increasing a deductible from $500 to $1500 in an insurance policy is an example of risk retention. When a policyholder opts for a higher deductible, they are choosing to assume more financial responsibility for potential losses. This means that in case of a claim, the policyholder will pay a larger portion of the loss out of their own pocket before the insurance coverage kicks in.

By retaining more risk, the policyholder may also reduce their premium costs, as insurance companies typically charge lower premiums for higher deductibles. This decision reflects a conscious choice to keep certain risks rather than transferring them entirely to the insurance provider. Risk retention can be an effective strategy for individuals or businesses that have the financial capability to handle these higher deductibles and prefer to manage their own risks directly instead of relying solely on insurance.

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Risk Reduction

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