Property and Casualty Insurance Practice Exam

If a business wants to eliminate specific risks, which method should it consider?

1. Transferring the risk

2. Avoiding the risk

3. Retaining the risk

4. Controlling the risk

The correct answer is: Avoiding the risk

The method of avoiding the risk is the most effective way for a business to eliminate specific risks altogether. This approach involves making decisions that completely sidestep the possibility of the risk materializing. For instance, if a business identifies that a particular activity or investment poses a high risk of loss, it can choose not to engage in that activity at all. By doing so, the business removes any exposure to that risk. In contrast, transferring the risk involves shifting the burden of risk to another party, often through insurance, which does not eliminate the risk but rather reallocates it. Retaining the risk means accepting the potential consequences and managing them internally, which could lead to exposure if the risk does occur. Controlling the risk, on the other hand, involves implementing measures to minimize the likelihood or impact of the risk, but it still does not eliminate it completely. Therefore, for a business determined to eliminate specific risks entirely, avoiding the risk is the most direct and comprehensive strategy.