Question

3. Explain avoidance, risk prevention, and risk reduction. Give an example for each

Answer 1

Answer :

Avoidance :

Escapement from a liability or obligation generally through ingenious and legal means, such as Risk avoidance or Cost Avoidance or Tax Avoidance

Risk Avoidance :

Risk avoidance means not performing any activity that may carry risk. It deals with eliminating any exposure to risk that poses a potential loss. It is a method to decrease the vulnerabilities which can cause threat. Technique of risk management to avoid risk involves

(1) Taking steps to remove a hazard,

(2) Engage in alternative activity, or

(3) Otherwise end a specific exposure.

Risk avoidance is the elimination of hazards, activities and exposures that can negatively affect an organization's assets.

Example :

A Bank considers expanding its products to include financial derivatives. After completing a business plan, the bank determines that the plan is risky and decides not to pursue the strategy to avoid the risk.

Cost Avoidance : It is an action taken to decrease the costs in the business process.

Tax Avoidance : Tax avoidance is reduction of a tax liability through legal methods.. Tax avoidance is not advisable as it could be used for one's advantage to reduce the amount of tax payable. Foe example , High-income individuals avoid significant federal income taxes by purchasing an government bonds.

Risk Reduction :

Risk reduction deals with mitigating potential losses while engaging in potentially risky financial behaviour. Risk Reduction deals with reducing the likelihood and severity of a possible loss .It measures to reduce the frequency or severity of losses, also known as loss control. May include engineering, fire protection, safety inspections, or claims management.

Example :

The way an insurance company can reduce its financial losses by implementing measures that will prevent actualizing risks or minimizing the number that can actually happen.

Risk Prevention :

Risk Prevention is the set of methods by which firms evaluate potential losses and take action to reduce or eliminate such threats. Risk prevention is a business strategy that aims to identify , assess, and prepare for any dangers, hazards and disaster. It helps companies to limit their lost assets and income. It is a technique that utilizes findings from risk assessments, which involve identifying potential risk factors in a company's operations. It also implements proactive changes to reduce risk in these areas.

Example :

A company storing flammable material in a warehouse installs state-of-the-art water sprinklers for minimizing damage in case of fire.