Insurance Broker Certification Practice Exam

What must a business do if it wants to manage risks through avoidance?

1. Engage in the activity cautiously

2. Discontinue the risky activity altogether

3. Transfer the risk to another party

4. Prepare for potential losses

The correct answer is: Discontinue the risky activity altogether

To manage risks through avoidance, a business must discontinue the risky activity altogether. Risk avoidance is a proactive strategy that entails eliminating any potential exposure to risk by not engaging in behavior or activities that could lead to adverse outcomes. For example, a company might choose not to expand into a market that poses significant legal or financial risks, thereby avoiding any associated threats. This approach differs fundamentally from merely engaging cautiously in the activity, which still exposes the business to some level of risk. Similarly, transferring risk to another party—such as through insurance—does not eliminate the risk but instead shifts it elsewhere. Preparing for potential losses indicates acknowledgment of risk and a reactive stance rather than avoidance. By completely discontinuing the risky activity, a business eliminates the potential for negative consequences, making avoidance a clear and effective strategy for risk management.