What is the primary risk-handling technique used in insurance?

The primary risk-handling technique used in insurance is risk transfer. This approach involves shifting the financial burden of a loss from an individual or business to an insurance company. When a policyholder purchases insurance, they essentially transfer the risk of certain potential losses to the insurer in exchange for premium payments. This allows the individual or business to protect themselves from the financial consequences of unforeseen events, such as accidents, property damage, or other liabilities.

In the context of insurance, risk transfer is fundamental because it enables individuals and organizations to manage their risk exposure effectively. The insurer pools the premiums from many policyholders, which allows them to cover the costs of claims made by those who experience losses, thereby providing financial security.

Other techniques, while relevant in different contexts, do not serve as the primary mechanism in insurance. Risk avoidance involves eliminating a risk entirely, which is not always feasible. Risk sharing involves distributing the risk among several parties, and risk retention means assuming responsibility for the loss, either entirely or partially. In the insurance model, risk transfer remains the most effective and straightforward method for managing risks.