Risk Treatment and Mitigation Flashcards

A manufacturer keeps a full set of critical machine parts at an off-site warehouse that is used only if the primary stock is destroyed. Which risk control technique is this?

Answer: Duplication

Duplication relies on backups or spares that are not used in daily operations unless a loss occurs.

A retailer splits its inventory evenly between two warehouses that both ship orders every day. Which risk control technique does this illustrate?

Answer: Separation

Separation spreads assets or activities across locations that are all used in normal operations, which limits the loss from any one event.

An automatic sprinkler system in a warehouse is mainly an example of which risk control technique?

Answer: Loss reduction

Sprinklers do not stop fires from starting, but they reduce how severe a fire becomes.

Which statement best describes a major limitation of exposure avoidance as a risk treatment?

Answer: It gives up the benefits of the avoided activity and may not be feasible for core operations

Avoidance removes the chance of loss entirely, but the organization also loses whatever the activity would have earned.

Diversification as a risk control technique applies mainly to which type of risk?

Answer: Speculative business risks

Diversification spreads business risk across different products, markets, or customers, which mainly affects speculative risk.

A tenant signs a lease agreeing to pay for the landlord's liability losses that arise from the tenant's use of the premises. This is best classified as:

Answer: Noninsurance risk transfer for risk financing (hold-harmless agreement)

A hold-harmless agreement moves the financial burden of a loss to another party without using insurance.

Under the frequency-severity approach, which loss exposure is generally best suited to retention?

Answer: High frequency, low severity

Frequent small losses are predictable and affordable, so retaining them is usually cheaper than insuring them.