What does risk transfer mean in the context of insurance?

What does risk transfer mean in the context of insurance?

• A. The insured transfers the risk of loss to the insurer by paying a premium.
• B. The insurer transfers risk to the insured by paying dividends.
• C. The insured avoids all risk by policy.
• D. The insurer guarantees profits to the insured.

Answer: (A)

Risk transfer means the financial burden of a potential loss is shifted from you to the insurer. When you pay a premium, the insurer agrees to cover specified losses, up to policy limits, so you don’t have to bear the full cost yourself. You still have some residual risk, such as deductibles or losses not covered by the policy, but the major financial impact of a loss is borne by the insurer. The other options miss this core idea: dividends aren’t the mechanism for transferring risk, and insurance does not eliminate all risk or guarantee profits.

Risk transfer means the financial burden of a potential loss is shifted from you to the insurer. When you pay a premium, the insurer agrees to cover specified losses, up to policy limits, so you don’t have to bear the full cost yourself. You still have some residual risk, such as deductibles or losses not covered by the policy, but the major financial impact of a loss is borne by the insurer. The other options miss this core idea: dividends aren’t the mechanism for transferring risk, and insurance does not eliminate all risk or guarantee profits.