Which risk management decision involves transferring risk by purchasing insurance?

Which risk management decision involves transferring risk by purchasing insurance?

• A. Avoidance.
• B. Transfer.
• C. Reduction.
• D. Retention.

Answer: (B)

Transferring risk by purchasing insurance shifts the financial consequences of a potential loss from you to the insurer in exchange for a premium. Insurance acts as a contract where the insurer agrees to cover specified losses, so your exposure is moved away from you. Other approaches work differently: avoidance means not taking on the exposure at all, reduction lowers the likelihood or impact of a loss, and retention keeps the risk and pays for losses yourself. The act of buying insurance is the classic way to transfer risk.

Transferring risk by purchasing insurance shifts the financial consequences of a potential loss from you to the insurer in exchange for a premium. Insurance acts as a contract where the insurer agrees to cover specified losses, so your exposure is moved away from you. Other approaches work differently: avoidance means not taking on the exposure at all, reduction lowers the likelihood or impact of a loss, and retention keeps the risk and pays for losses yourself. The act of buying insurance is the classic way to transfer risk.