16. A company decides to purchase an insurance policy. Which of the following risk management strategies is this company implementing?
Answer: D
The company is implementing a transfer risk management strategy.
By purchasing an insurance policy, the company is transferring its financial risk to the insurance provider. This strategy allows the company to safeguard itself against potential losses by shifting the responsibility of risk to another party.
A) Mitigate
Mitigation involves reducing the impact or likelihood of risks rather than transferring them. In this case, the company is not taking steps to reduce the risk itself but is instead opting to transfer it through insurance. Therefore, this option does not accurately reflect the action taken.
B) Accept
Acceptance of risk means that a company acknowledges the risk and decides to bear the consequences without any external support. Purchasing insurance is contrary to this approach, as it indicates a desire to avoid potential losses rather than accepting them.
C) Avoid
Avoidance involves eliminating the risk entirely, which is not what the company is doing by buying an insurance policy. Instead of avoiding the risk, the company is acknowledging it and choosing to protect itself against possible outcomes, making this option incorrect.
D) Transfer
By purchasing an insurance policy, the company effectively transfers the financial consequences of certain risks to the insurance company. This is the primary characteristic of the transfer strategy, making this option the correct choice.
Conclusion
The company's decision to purchase an insurance policy exemplifies the transfer risk management strategy, as it shifts the potential financial burden of risks to an insurer. Options A, B, and C do not accurately describe the action taken, highlighting the distinct nature of risk transfer in this scenario.