How can risk be managed according to insurance principles?

The management of risk according to insurance principles encompasses various strategies aimed at minimizing the potential negative impacts of unforeseen events. The correct approach involves avoidance, reduction, sharing, or transfer of risks.

Avoidance is the strategy of eliminating any exposure to a particular risk, which effectively removes the possibility of loss. Reduction refers to measures taken to minimize the likelihood or severity of a risk event, such as implementing safety protocols. Sharing involves distributing the risk among different parties, which can be seen in practices like insurance pooling. Lastly, transfer is achieved mainly through purchasing insurance, which shifts the financial burden of a risk from the insured to the insurer.

This approach underscores a comprehensive framework for risk management, integrating preventative measures and strategies to handle potential adverse outcomes when they do occur. In contrast, increasing premiums, conducting audits, or denying coverage may manage financial aspects or mitigate risk exposure but do not inherently address the essential strategies of risk management advocated by insurance principles.