What method of handling risk is defined as the planned assumption of risk through self-insurance?

The concept of retention in risk management refers to the deliberate decision to retain part or all of the risk associated with an exposure. This method involves recognizing that certain risks can be managed internally, often through self-insurance, where an individual or organization sets aside funds to cover potential losses rather than transferring the risk to an insurance provider.

By choosing to retain risk, entities can potentially reduce their insurance premiums and retain control over their financial obligations related to risks. This method is typically utilized in scenarios where the risk is manageable and the potential impact is well understood. It allows for greater flexibility in handling certain obligations and can be especially beneficial for organizations with sufficient resources to fund losses that are within their risk appetite.

In contrast, the other options present different risk management strategies. Transfer involves shifting the risk to a third party, such as through purchasing insurance. Avoidance entails eliminating the exposure entirely to prevent any potential loss, while diversification involves spreading out risk across various investments or practices to minimize the impact of a single failure.