South Dakota Crop Insurance Practice Exam

What would be the purpose of risk avoidance in a business?

1. To minimize potential claims

2. To shift financial responsibility

3. To eliminate exposure to certain risks

4. To increase insurance coverage

The correct answer is: To eliminate exposure to certain risks

Risk avoidance is a strategy that involves eliminating exposure to certain risks entirely to prevent them from occurring. This can be achieved by changing business practices, altering project plans, or choosing not to engage in specific activities that could present potential hazards. By completely avoiding particular risks, a business can prevent related losses before they happen, rather than managing, transferring, or accepting those risks. The context of the other choices provides a clearer understanding: minimizing potential claims relates to risk management strategies, shifting financial responsibility usually involves transferring risk through insurance policies or contracts, and increasing insurance coverage is about protecting against potential losses rather than avoiding risks altogether. However, risk avoidance focuses specifically on the proactive decision to eliminate risk, making it the most appropriate choice in this context.