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Difficulty: EasyMethods of Handling Risk

A restaurant owner is concerned about the potential financial devastation a kitchen fire could cause. To address this exposure, the owner takes two specific actions: they install an automatic fire suppression system above the cooking appliances, and they purchase a commercial property insurance policy.

Which of the following methods of handling risk is the restaurant owner actively employing? (Select two)

  1. Risk reductionAnswer
  2. Risk transferAnswer
  3. C
    Risk avoidance
  4. D
    Risk retention

Answer

The restaurant owner is utilizing both risk reduction (by installing the fire suppression system) and risk transfer (by purchasing commercial property insurance).
The scenario describes two distinct risk management actions. Installing a fire suppression system mitigates the severity of a potential fire, which represents risk reduction. Purchasing a commercial property policy shifts the financial burden of a covered loss to an insurance company, which represents risk transfer.

Step-by-Step Solution

1
Analyze the first action taken by the business owner.
Installing a fire suppression system.
This action does not prevent a fire from starting entirely, but it limits the potential damage if one occurs. Decreasing the severity of a loss is defined as risk reduction.
2
Analyze the second action taken by the business owner.
Purchasing a commercial property insurance policy.
By paying a premium to an insurance company, the owner shifts the potential financial burden of a loss from the business to the insurer. This is the definition of risk transfer.

Key Concept

Methods of Handling Risk (STARR)
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Topics

Methods of Handling Risk

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