PSI Ohio Insurance Practice Exam

Which method of handling risk involves an insured's effort to avoid risk?

1. Sharing

2. Assumption

3. Avoidance

4. Retention

The correct answer is: Avoidance

The method of handling risk that involves an insured's effort to avoid risk is avoidance. This approach entails taking proactive measures to eliminate potential hazards or circumstances that could lead to a loss. For example, if a business identifies that a particular activity poses substantial risk, choosing not to engage in that activity represents a clear act of risk avoidance. In contrast, sharing involves distributing the risk across multiple parties, such as through partnerships or insurance pools. Assumption refers to accepting the risk and its potential consequences, which means the insured is willing to take on the risk rather than mitigate it. Retention means that the insured decides to keep the risk, often as a way to save on insurance costs, accepting that they will bear the financial burden if a loss occurs. Each of these alternatives aims to address risk but does so in fundamentally different ways than avoidance does.