Casualty Actuarial Society (CAS) Practice Exam

How should a potential risk with high likelihood and minor consequences be managed?

1. With special precautions and additional resources

2. Through routine business procedures

3. By avoiding any activity related to the risk

4. By conducting extensive audits

The correct answer is: Through routine business procedures

Managing a potential risk characterized by a high likelihood and minor consequences is best achieved through routine business procedures. This approach allows organizations to integrate risk management seamlessly into their daily operations without the need for extraordinary measures. In this scenario, since the consequences of the risk are minor, the organization can rely on established practices to monitor and mitigate the impacts of the risk effectively. Routine business procedures are already designed to handle everyday uncertainties, making them a practical solution for risks that are not severe enough to warrant special attention or significant resource allocation. Implementing special precautions and additional resources might be unnecessary and could divert attention from more critical risks. Similarly, avoiding activities related to the risk would not be feasible or practical since the likelihood is high, and completely steering clear of associated activities could hinder business operations. Conducting extensive audits, while useful for more serious risks or less frequent occurrences, may overwhelm resources and is not warranted for risks that are minor in consequence and high in frequency. Therefore, routine procedures serve as an efficient and effective means to manage such risks.