Which risk management technique should be considered when the expected value of the losses from an activity outweighs the expected benefits of that activity?

Which risk management technique should be considered when the expected value of the losses from an activity outweighs the expected benefits of that activity?

• A. Separation
• B. Loss reduction
• C. Avoidance
• D. Risk financing

Answer: (C)

When the expected losses from an activity outweigh the expected benefits, the prudent move is avoidance—don’t undertake the activity to eliminate the exposure altogether. If the net value of engaging in the activity is negative, removing it from operations avoids the risk rather than paying to manage or transfer losses after they occur. Other techniques still leave some exposure: separation spreads risk but doesn’t remove the activity’s inherent risk; loss reduction lowers how bad a loss could be but doesn’t prevent the loss itself; and risk financing covers losses once they happen without reducing the likelihood of those losses. So avoidance best aligns with a negative net expected value by removing the risk source entirely.

When the expected losses from an activity outweigh the expected benefits, the prudent move is avoidance—don’t undertake the activity to eliminate the exposure altogether. If the net value of engaging in the activity is negative, removing it from operations avoids the risk rather than paying to manage or transfer losses after they occur.

Other techniques still leave some exposure: separation spreads risk but doesn’t remove the activity’s inherent risk; loss reduction lowers how bad a loss could be but doesn’t prevent the loss itself; and risk financing covers losses once they happen without reducing the likelihood of those losses. So avoidance best aligns with a negative net expected value by removing the risk source entirely.