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Difficulty: EasyMethods of Handling Risk

The Harrison family is evaluating their exposure to various daily hazards. Match each of their specific risk management actions to the correct method of handling risk.

  • Selling their speedboat to completely eliminate the chance of a boating accidentRisk Avoidance
  • Installing a centrally monitored security system to deter burglariesRisk Reduction
  • Purchasing a comprehensive personal liability umbrella policyRisk Transfer
  • Choosing an auto insurance plan with a $1,000 deductibleRisk Retention

Answer

Selling the boat matches Risk Avoidance; installing a security system matches Risk Reduction; purchasing a liability policy matches Risk Transfer; choosing a deductible matches Risk Retention.
Each action demonstrates a specific risk management technique. Avoiding the activity altogether (selling the boat) is Risk Avoidance. Taking steps to minimize damage (security system) is Risk Reduction. Buying insurance is Risk Transfer. Keeping a deductible is Risk Retention.

Step-by-Step Solution

1
Identify the action that eliminates the exposure entirely.
Selling the speedboat matches Risk Avoidance.
Because the family no longer owns the boat, the risk of a boating accident is completely removed.
2
Identify the action that mitigates the severity or frequency of a loss without eliminating it.
Installing a security system matches Risk Reduction.
An alarm does not stop all burglaries, but it reduces their likelihood and potential damage.
3
Identify the action that shifts financial responsibility to another party.
Purchasing an umbrella policy matches Risk Transfer.
Insurance is a mechanism for transferring the financial consequences of a loss to the insurance company.
4
Identify the action where the individual assumes financial responsibility for a loss.
Choosing a $1,000 deductible matches Risk Retention.
By having a deductible, the family retains the financial risk for the first $1,000 of any auto claim.

Key Concept

The primary methods of handling risk (often remembered by the acronym STARR): Sharing, Transfer, Avoidance, Reduction, and Retention.
Estimated Time:1m 0s
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Topics

Methods of Handling Risk

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