Casualty Actuarial Society (CAS) Practice Exam

What risk strategy should Jacob employ when the total risk exceeds past levels?

1. Risk avoidance to eliminate all risks

2. Risk transfer to a third party

3. Risk treatment to align with risk tolerance

4. Risk acceptance to continue business as usual

The correct answer is: Risk treatment to align with risk tolerance

The appropriate risk strategy for Jacob to employ when total risk exceeds past levels is to implement risk treatment to align with risk tolerance. This approach involves analyzing the current risks, understanding the organization’s risk appetite, and taking actionable steps to either mitigate, accept, or transfer those risks as necessary. Risk treatment is essential when risks have escalated, as it allows for adjustments to be made that can either reduce potential impacts or ensure that any residual risks are manageable within the established risk tolerance. This could involve enhancing controls, improving processes, or diversifying exposure to certain risks, thus ensuring that the organization can continue to operate effectively while managing its risk profile. The other strategies, while viable in various contexts, may not be ideal in this scenario. For example, risk avoidance to eliminate all risks can be unrealistic, as completely avoiding risk could hinder business operations and growth. Risk transfer to a third party, such as through insurance, might not fully address the level of risk or could lead to increased costs without ensuring adequate coverage. Lastly, risk acceptance means acknowledging the risk without taking further action, which could lead to unfavorable outcomes, especially in the context of elevated risk levels. Therefore, the most prudent approach in this case is indeed risk treatment, helping Jacob address and manage