Insurance Broker Certification Practice Exam

What does avoidance in insurance refer to?

1. A method of spreading risk among several policyholders

2. Eliminating exposure to a loss

3. Taking on the financial risk personally

4. A way to minimize losses through safety measures

The correct answer is: Eliminating exposure to a loss

Avoidance in insurance specifically refers to the strategy of eliminating exposure to a potential loss altogether. This means that an individual or organization takes deliberate steps to prevent the possibility of a risk occurring. For example, if a company is concerned about the risks associated with operating heavy machinery, it might choose not to engage in this type of operation at all. By doing so, the company avoids any associated liabilities or claims that could arise from accidents related to machinery use. This approach focuses on the proactive elimination of risk rather than merely managing or transferring it. The other options represent different risk management techniques but do not specifically align with the concept of avoidance. Spreading risk among policyholders relates to the principle of insurance and pooling risk, taking on the financial risk personally implies acceptance of risk without mitigating it, and minimizing losses through safety measures focuses on preventing or reducing loss impact rather than completely avoiding risk exposure.