RESPONSE TO RISK

Risk Control

Risk Avoidance
A risk may be avoided if the individual refuses to accept risk by not engaging in an action that creates a risk (removal of the peril).
Consider the following risk avoidance instances:
  • Taking the bus rather than buying a car
  • Renting a home rather than buying it
  • Not buying an office building without a sprinkler system

Risk Diversification
Risk diversification, also known as risk sharing, is a method of reducing your total exposure to risk by sharing the responsibility with another party.
Consider the following risk diversification strategies:
  • Forming a limited partnership for your business
  • Hedging contracts
  • Health insurance with deductibles and co-payments

Risk Reduction
Risk reduction is the process of diminishing risk through the implementation of loss prevention methods or implementing safety features or improvements.
Consider the following risk reduction techniques:
  • Mounting smoke detectors in your building
  • Installing hurricane shutters on your home
  • Put a burglary system on your vehicle

Risk Financing
Risk Retention
Risk retention is the act of accepting risk and confronting it if and when it occurs. In this process, no action is taken to avoid, transfer, or reduce risk.
Consider the following risk retention actions:
  • Self-insurance
  • Coinsurance in various insurance policies
  • Utilizing deductibles in insurance contracts

Risk Transfer
Risk transfer is the practice of shifting risk responsibility either through an individual or an insurance contract. The most effective way to handle risk is to transfer it so that the loss is consumed by another party.
Consider the following risk transfer solutions:
  • Purchasing an insurance policy
  • Obtaining high protection limits on your auto policy
  • Reassign the risk to another individual

Practice Question:
Of the following methods of handling risk, which technique best describes "wearing seat belts" when driving your motor vehicle?

A. Risk Avoidance
B. Risk Transfer
C. Risk Retention
D. Risk Reduction

Answer: D
Risk reduction is the practice of reducing or eliminating risk by implementing safety features, such as using a seat belt.

Practice Question:
For risks that involve high loss severity and low loss frequency, the most suitable procedure is?

A. Risk Sharing
B. Risk Reduction
C. Risk Avoidance
D. Risk Transfer

Answer: D
Risk Transfer is the best answer. Transferring risk to an insurance policy is the most effective method of preparing for high loss severity and low loss frequency. High loss and high frequency risks should be avoided.
The Legal Aspects of Insurance

Related Articles
  1. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  2. Managing Wealth

    Why Companies Need Risk Management

    Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff?
  3. Investing

    The Risks Associated with Common Investments

    Investing inherently involves some risk. Here are some of the different types of investment risks.
  4. Investing

    Methods of Handling Risk: A Quick Guide

    Discover the five methods to manage pure risk, and learn how they can be implemented to mitigate risk with health and life insurance.
  5. Tech

    The Importance of Healthcare Risk Management

    Risk management is especially important in healthcare because human lives might be on the line. Here are some strategies to map out a plan.
  6. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  7. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  8. Investing

    Systematic Risk

    Systematic risk, also known as volatility, non-diversifiable risk or market risk, is the risk everyone assumes when investing in a market. Think of it as the overall, aggregate risk that comes ...
  9. Personal Finance

    What Does It Really Mean to Be Risk Averse?

    We can’t really get away from risk and there are many meanings for this thing we call risk.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center