Massachusetts Life Producer Practice Exam

Which of the following describes the act of insuring a risk against possible loss?

1. Risk assessment

2. Risk avoidance

3. Risk retention

4. Risk transfer

The correct answer is: Risk transfer

The act of insuring a risk against possible loss is best described by the concept of risk transfer. This principle involves shifting the financial burden of a potential loss from the individual or organization to another party, typically an insurance company. When someone purchases an insurance policy, they pay premiums in exchange for the insurer's promise to cover specific losses as defined in the policy. This mechanism allows individuals and businesses to protect themselves from unpredictable financial setbacks that could arise from various risks, such as accidents, natural disasters, or other unforeseen events. By transferring the risk, they can have greater peace of mind knowing that they have a safety net in place. In contrast, risk assessment refers to the evaluation of potential risks, risk avoidance involves taking actions to eliminate risks entirely, and risk retention is the acceptance of risk where the individual or organization decides to bear the potential costs associated with a loss without transferring that risk to an insurer.