Final answer:
Loss retention is effective when a company holds onto a risk, with the understanding that it is not catastrophic, it has the financial means to cover it, and insurance is expensive. The option 'The company wants to transfer the risk' is not a requirement for loss retention, as this practice is about keeping the risk in-house.
Step-by-step explanation:
In the context of risk management and insurance, loss retention can be an effective technique for companies to handle potential risks.
However, among the circumstances listed for effective loss retention, C) The company wants to transfer the risk to another party would not be a requirement.
The idea of loss retention is inherently about absorbing risks, not transferring them.
When a company practices loss retention, it holds onto certain types of risk instead of transferring it through purchasing insurance. This strategy is typically employed when:
- The potential loss is not catastrophic and within the company's tolerance.
- The company has adequate financial resources to cover potential losses, should they occur.
- The cost of insurance is prohibitively high, making retention a more cost-effective option.
The factors such as adverse selection can complicate the insurance market, and companies must weigh the cost of insurance against the potential benefit of transferring the risk.