Final answer:
Loss retention is an effective risk management strategy if there are adequate financial resources, predictable losses, and a sufficient level of risk tolerance. ‘High-risk exposure’ is NOT a circumstance that needs to be met for effective loss retention, as it can overwhelm an entity's ability to retain loss.
Step-by-step explanation:
Loss retention is a risk management strategy that involves an individual or entity assuming responsibility for certain losses rather than transferring that risk to an insurance company. The effective application of loss retention must meet several circumstances. These circumstances include having adequate financial resources to absorb the loss, experiencing predictable losses with a frequency and severity that can be estimated, and having a sufficient level of risk tolerance as an organization or individual. The one circumstance that does not need to be met for loss retention to be effective is c) High-risk exposure. High-risk exposure actually argues against retention because the unpredictability and high potential loss can overwhelm the resources and risk tolerance of the entity.
Insurance is based on pooling and sharing risk, with the premise that all participants will contribute premiums that together cover the claims and company costs, and allow for company profits. Entities or individuals facing high-risk exposure would generally require insurance or other risk transfer mechanisms to protect against financial catastrophes that exceed their ability to retain loss.