Analyze the following risk management decisions made by various individuals and businesses. Match each specific action to the corresponding fundamental method of handling risk (commonly remembered by the acronym STARR).
- A cybersecurity consultant declines a highly profitable contract because the client requires handling classified data, posing an unacceptable liability exposure.Risk Avoidance
- A retail boutique owner sets aside a dedicated cash reserve to pay out-of-pocket for minor inventory theft rather than filing small insurance claims.Risk Retention
- A group of regional dairy farmers forms a formal cooperative pool to distribute the financial burden of livestock illness equally among all members.Risk Sharing
- An independent architect purchases an errors and omissions (E&O) policy to protect their personal assets from potential client lawsuits.Risk Transfer
- A homeowner installs a centrally monitored burglar alarm and heavy-duty deadbolt locks after a recent string of neighborhood break-ins.Risk Reduction
Answer
The correct matches are: the consultant declining the contract is Risk Avoidance, the boutique cash reserve is Risk Retention, the farmers' cooperative pool is Risk Sharing, purchasing the E&O policy is Risk Transfer, and installing the alarm is Risk Reduction.
Each scenario directly correlates to one of the five primary methods of handling risk (STARR). Avoidance eliminates the hazard, Retention absorbs it, Sharing distributes it, Transfer shifts it to an insurer, and Reduction mitigates its likelihood or impact.
Step-by-Step Solution
Key Concept
The STARR Methods of Handling Risk (Sharing, Transfer, Avoidance, Reduction, Retention)