Which of the following is an example of risk transfer?

• A. Purchasing Insurance
• B. Setting Aside Funds for Losses
• C. Avoiding the Activity
• D. Accepting All Risk

Answer: (A)

Transferring risk means moving the potential financial burden of a loss to someone else. Buying insurance does this: you pay a premium and the insurer agrees to cover specified losses, so the financial impact falls on the insurer rather than you. This is the clearest example of risk transfer because the risk is shifted to a third party through a formal contract.

Setting aside funds for losses is a form of self-insurance, where you still bear the risk but hold reserves to cover it. It keeps the financial burden with you rather than transferring it. Avoiding the activity reduces or eliminates risk but doesn’t transfer it to someone else. Accepting all risk means you shoulder every potential loss yourself, with no transfer.