Insurance Broker Certification Practice Exam

Which risk management technique involves avoiding a specific loss by not engaging in the activity?

1. Retention

2. Transfer

3. Avoidance

4. Reduction

The correct answer is: Avoidance

The technique that involves avoiding a specific loss by not engaging in an activity is known as avoidance. This strategy is grounded in the principle that if a certain risk presents a significant potential for loss, one can entirely eliminate that risk by choosing not to partake in the activity that creates it. For example, a company may choose not to engage in high-risk ventures, such as investing in volatile markets, thereby avoiding any potential financial losses associated with those investments. In the context of risk management, avoidance is a proactive method that eliminates exposure to risks rather than merely managing them. By opting out of risky activities, an individual or organization can effectively shield itself from the potential adverse outcomes associated with those risks. This is distinct from other risk management techniques, which may involve retaining some level of risk, transferring it to another party, or implementing measures to reduce its impact while still maintaining the activity that generates it.