A large manufacturing organisation has renewed an insurance policy and has accepted a significant increase in the policy deductible. What is this…

An insurance policy is a form of risk treatment, specifically risk sharing or transfer. The deductible is the portion of the loss that the insured entity agrees to pay out-of-pocket. By accepting a significant increase in this deductible, the manufacturing organization is consciously choosing to absorb a larger portion of the potential financial loss itself, rather than transferring it to the insurer. This is a direct application of the risk treatment option known as "risk retention." The increase in the deductible directly corresponds to an increased level of retained risk.

A. Decreased risk avoidance: This action is a treatment for an existing risk within an ongoing operation; it is not related to a decision to avoid or cease avoiding an activity.

B. Decreased risk tolerance: Accepting a higher potential out-of-pocket loss (a higher deductible) indicates an increased readiness to bear risk, which signifies increased risk tolerance, not decreased.

C. Increased risk elimination: The underlying source of the risk (e.g., potential for fire, equipment failure) is not being removed or eliminated; only the financial strategy for managing its consequences is changing.

1. International Organization for Standardization (ISO). (2018). ISO 31000:2018 Risk management — Guidelines.

Clause 6.5.2, "Selection of risk treatment options," lists "retaining the risk by informed decision" as a primary option. It also lists "sharing the risk" (e.g., via insurance). An increased deductible represents a deliberate shift from sharing a portion of the risk to retaining it.

2. Hopkin, P. (2018). Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management (5th ed.). Kogan Page.

Chapter 13, "Risk Treatment," explains that risk retention (or risk acceptance) can be a deliberate strategy. Using deductibles or excesses on insurance policies is cited as a common example of partial risk retention, where the organization accepts the first part of any loss.

3. Leitch, M. (2010). ISO 31000:2009—The New International Standard on Risk Management. Risk Analysis: An International Journal, 30(6), 887-892.

DOI: https://doi.org/10.1111/j.1539-6924.2010.01442.x

On page 890, the article discusses the risk treatment process as outlined in the standard, which includes the options to retain or share risk. The scenario described in the question is a practical application of adjusting the balance between these two specific treatment options.