Purchasing an insurance policy is an example of which method of handling risk?

Choosing to purchase an insurance policy exemplifies the method of risk transfer. This approach involves shifting the financial responsibility for potential losses from the insured party to the insurer. By paying premiums for an insurance policy, the individual or business effectively transfers the risk of particular events—such as accidents, theft, or natural disasters—to the insurance company.

When a claim is made, the insurer assumes the burden of the loss as outlined in the policy, thus protecting the insured from financial devastation that could arise from unexpected events. This method is fundamental in risk management, as it allows individuals and businesses to mitigate the impact of unforeseen circumstances by ensuring they have a financial safety net in place.

In contrast, risk retention involves accepting the risk and potentially facing the loss directly, while risk avoidance means taking steps to eliminate the possibility of the risk altogether. Risk reduction, on the other hand, focuses on minimizing the severity or impact of the risk. Each of these methods can play a role in comprehensive risk management strategies but does not convey the same mechanism of financial protection as risk transfer does through insurance.