Alabama Insurance Adjuster Practice Exam

When a company decides not to insure certain risks, what practice are they engaging in?

1. Risk reduction

2. Risk avoidance

3. Risk transfer

4. Risk retention

The correct answer is: Risk avoidance

The practice of a company deciding not to insure certain risks is referred to as risk avoidance. This approach involves identifying potential risks and taking steps to eliminate or avoid them entirely. By not insuring specific risks, the company is effectively opting out of those exposures, thereby removing the chance of incurring a loss associated with those risks. In many cases, risk avoidance might involve choosing not to engage in certain activities or refraining from entering markets or regions where risks are deemed too high. This proactive strategy aims to protect the organization from the potential financial burden that could arise from those specific risks. Other concepts related to risk handling, such as risk reduction, involve implementing measures to lessen the severity or likelihood of losses. Risk transfer typically refers to shifting the risk to another party, often through insurance, while risk retention involves accepting the risk inherent in an activity or policy, usually by paying for potential losses out of pocket. However, in this scenario, where a company has chosen not to insure specific risks, the terminology of risk avoidance is the most applicable.