Buying an insurance policy is an example of which method of handling risk?
Explanation
Insurance is the transfer of the financial consequences of a risk from an individual to an insurer in exchange for a premium. Avoidance means not engaging in the risky activity at all. Retention means keeping the risk yourself, as with a deductible or self-insurance. Reduction means taking steps to lower the frequency or severity of loss, such as installing smoke detectors. Only transfer shifts the risk to another party, which is precisely what an insurance contract accomplishes.
This topic, taught in full in the California Life & Health Insurance Producer Exam guide. California Life & Health Insurance Producer Exam — Complete Study Guide (2026) — PDF + EPUB, $19.99 · 14-day refund →
Practice all 716 questions free — no signup required.
Own the complete California Life & Health Insurance Producer Exam guide — PDF + EPUB, $19.99 →
Related questions on this topic
- The principle that allows insurers to predict losses more accurately as the number of similar exposure units increases is known as:
- An insurance policy is considered a 'contract of adhesion.' What does this mean?
- In insurance, a 'moral hazard' refers to:
- Which of the following is a pure risk that an insurer would generally be willing to cover?
- In insurance terminology, the actual cause of a loss, such as fire, illness, or death, is called a:
- Which situation best illustrates a physical hazard?
Last reviewed: · editorial process