Texas General Lines — Property and CasualtyGeneral InsuranceMedium
An insurance underwriter is reviewing an application for property insurance on an older building located in a known flood zone. The underwriter notes that the building's foundation has been elevated and special flood vents have been installed. In the context of risk management, what technique has the applicant primarily employed to reduce their exposure to flood damage?
- ARisk retention
- BRisk transfer
- CRisk reduction
- DRisk avoidance
Show answer & explanationAnswer & explanation
Correct answer: C. Risk reduction
Elevating the foundation and installing flood vents are physical modifications designed to lessen the severity or frequency of loss (flood damage). This directly corresponds to the risk management technique of risk reduction (or loss control).
Why the other options are wrong
- A. Risk retention involves accepting the financial consequences of a loss, such as through a high deductible or self-insurance, not making physical changes.
- B. Risk transfer involves shifting the financial burden of loss to another party, typically an insurer, by purchasing an insurance policy.
- D. Risk avoidance would mean not owning the building or not locating in a flood zone at all.
Risk Reduction (Loss Control)
A risk management technique that involves implementing measures to decrease the frequency or severity of potential losses.
- Aims to reduce the impact of a risk.
- Examples include safety programs, physical barriers, sprinkler systems.
- Can be implemented before a loss (loss prevention) or after a loss (loss reduction).
Memory trick: STARR: Share, Transfer, Avoid, Retain, Reduce.