From a risk management perspective, insurance is used to do which of the following?

From a risk management perspective, insurance is used to do which of the following?

• A. Transfer the cost of losses
• B. Reduce the probability of a loss
• C. Eliminate all losses
• D. Increase the frequency of losses

Answer: (D)

Insurance is a risk financing tool that transfers the financial burden of potential losses from the insured to the insurer in exchange for a premium. The main benefit is converting an uncertain, potentially large financial hit into a known, manageable cost funded by the insurer, up to policy limits. This helps with liquidity and planning after a loss. It doesn’t change how likely a loss is to occur—that’s the realm of risk avoidance or risk reduction strategies. It also doesn’t guarantee that no losses will happen, nor does it increase how often losses occur. The essential purpose is financial protection by shifting the cost of losses to a broad risk pool.

Insurance is a risk financing tool that transfers the financial burden of potential losses from the insured to the insurer in exchange for a premium. The main benefit is converting an uncertain, potentially large financial hit into a known, manageable cost funded by the insurer, up to policy limits. This helps with liquidity and planning after a loss.

It doesn’t change how likely a loss is to occur—that’s the realm of risk avoidance or risk reduction strategies. It also doesn’t guarantee that no losses will happen, nor does it increase how often losses occur. The essential purpose is financial protection by shifting the cost of losses to a broad risk pool.