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

An insurance deductible represents the portion of a financial loss that an organization agrees to pay itself before the insurance provider covers the remainder. By accepting a significant increase in this deductible, the organization is consciously choosing to absorb a larger potential loss. This action is a classic example of risk retention, where an organization makes an informed decision to retain a greater share of a specific risk. This is a common risk treatment strategy, often chosen to reduce insurance premium costs in exchange for accepting a higher level of self-insurance for smaller, more frequent losses.

A. Decreased risk avoidance: Risk avoidance involves deciding not to engage in an activity that creates risk. Renewing an insurance policy for an ongoing operation is the opposite of avoidance.

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

C. Increased risk elimination: Risk elimination means removing the source of the risk entirely. Managing financial consequences through insurance and deductibles does not eliminate the underlying operational risks.

1. ISO 31000:2018 - Risk management — Guidelines

Clause 6.5.2

"Selection of risk treatment options". This section lists "retaining the risk by informed decision" as a primary option for risk treatment. Increasing a deductible is a direct application of this principle.

2. ISO Guide 73:2009 - Risk management — Vocabulary

Definition 3.8.4

"Risk retention". The guide defines risk retention as the "acceptance of the... burden of loss

from a particular risk." A deductible is the explicit acceptance of a burden of loss.

3. Hopkin

P. (2018). Fundamentals of Risk Management: Understanding

Evaluating and Implementing Effective Risk Management (5th ed.). Kogan Page. In Chapter 13

"Risk Treatment

" the text explains that deductibles or excesses on insurance policies are a form of risk retention. It states

"The level of the deductible... represents the amount of risk that is retained by the organization." (p. 268). This is a standard textbook in university risk management programs.

4. Fraser

J. R.

& Simkins

B. J. (Eds.). (2010). Enterprise Risk Management: Today's Leading Research and Best Practices for Tomorrow's Executives. John Wiley & Sons. In Chapter 11

"Risk Transfer

" the authors discuss insurance as a risk transfer mechanism and explicitly describe deductibles as a form of risk retention by the insured party. (Section: "The Role of Insurance in ERM").