14. Which risk management technique is applied when insurance is purchased to protect a risk?
Answer: D
Transfer
Insurance is a risk management technique that involves transferring the financial consequences of a risk to another party, typically an insurance company. By purchasing insurance, individuals or organizations effectively shift the burden of potential loss away from themselves.
A) Avoidance
Avoidance is a risk management technique that involves eliminating a risk by not engaging in certain activities. This option is incorrect in this context because purchasing insurance does not eliminate the risk; it merely provides a safety net should the risk manifest.
B) Elimination
Elimination refers to completely removing a risk from consideration, which is not applicable when discussing insurance. Insurance does not eliminate risks; instead, it provides financial protection against them. Therefore, this option is incorrect.
C) Reduction
Reduction involves taking steps to reduce the likelihood or impact of a risk. While insurance can be part of a broader risk reduction strategy, it does not directly reduce the risk itself. Instead, it provides compensation in the event of a loss, making this option incorrect.
D) Transfer
Transfer is the correct answer as it accurately describes the process of buying insurance to shift the financial risk to an insurer. This technique allows individuals and organizations to manage their exposure to potential losses effectively.
Conclusion
The correct answer is Transfer, as it precisely captures the essence of purchasing insurance to manage risk. Other options like Avoidance, Elimination, and Reduction do not align with the concept of transferring risk, highlighting the unique role that insurance plays in risk management strategies.