Risk Avoidance
Eliminating a risk entirely by never undertaking the activity that creates it, such as refusing to fly to avoid aviation risk. Elimination means the chance of that loss becomes zero.
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Practice This Concept
A manufacturer removes a dangerous machine from its factory floor rather than keeping it and installing guards and training staff. The removal and the guards-plus-training are, respectively, examples of:
Avoidance and loss reduction — Removing the machine eliminates the exposure entirely, which is risk avoidance — the only technique that removes the possibility of loss. Keeping the machine but adding guards and training does not eliminate the exposure; it reduces the frequency or severity of potential injuries, which is loss reduction (also called loss control). The two techniques operate at different points: one deletes the risk, the other shrinks it.
National insurance concept
A family decides to purchase a life insurance policy on the primary wage earner so that the insurer will pay a death benefit if that person dies prematurely. This is best described as which risk management technique?
Risk transfer — Insurance is the classic example of risk transfer: the financial burden of a possible loss is shifted from the individual or family to the insurer in exchange for a premium. By paying a relatively small, certain premium, the family is protected against a large, uncertain financial loss, and the insurer assumes the economic consequences of the wage earner's premature death. Risk avoidance means eliminating the exposure entirely, such as never flying. Risk retention means keeping the risk and paying losses out of pocket, and risk reduction means lowering the likelihood or severity of a loss without shifting it to another party.
National insurance concept
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