Which statement about risk transfer is true?

Which statement about risk transfer is true?

• A. It shifts financial burden to another party such as insurer
• B. It eliminates all risk
• C. It increases risk exposure
• D. It is the same as risk avoidance

Answer: (A)

Transferring risk means moving the financial impact of a potential loss to another party through a contract or arrangement, most commonly an insurance policy. You pay a premium, and the insurer bears the cost if a covered event happens. But the risk itself isn’t gone; the likelihood of the event can still occur, just the financial consequence is shifted. That’s why shifting the financial burden to an insurer is the best description of risk transfer. It captures the core idea: you’re reallocating potential costs to someone else via a formal agreement. The other ideas don’t fit as well. Risk transfer does not eliminate all risk—the event could still occur, and there can be limits or exclusions in a policy. It also doesn’t inherently increase risk exposure; it typically reduces financial exposure by moving costs to another party. And it isn’t the same as risk avoidance, which means steering clear of the activity altogether to avoid the risk entirely.

Transferring risk means moving the financial impact of a potential loss to another party through a contract or arrangement, most commonly an insurance policy. You pay a premium, and the insurer bears the cost if a covered event happens. But the risk itself isn’t gone; the likelihood of the event can still occur, just the financial consequence is shifted.

That’s why shifting the financial burden to an insurer is the best description of risk transfer. It captures the core idea: you’re reallocating potential costs to someone else via a formal agreement.

The other ideas don’t fit as well. Risk transfer does not eliminate all risk—the event could still occur, and there can be limits or exclusions in a policy. It also doesn’t inherently increase risk exposure; it typically reduces financial exposure by moving costs to another party. And it isn’t the same as risk avoidance, which means steering clear of the activity altogether to avoid the risk entirely.