Washington Life Producer Practice Exam

Which type of risk management technique involves sharing the risk of loss with others?

1. Risk retention

2. Risk transfer

3. Risk avoidance

4. Risk reduction

The correct answer is: Risk transfer

The technique of sharing the risk of loss with others is known as risk transfer. This approach typically involves transferring the financial burden of a risk to another party, which is often done through the use of insurance policies or partnerships. By doing so, an individual or organization can protect themselves from significant losses that could arise from unforeseen events. For example, when a business purchases insurance, it transfers the risk of certain potential losses to the insurance company, which then agrees to cover those losses to an agreed extent. This allows the business to mitigate its potential financial exposure and continue operations with greater peace of mind. The other options represent different risk management techniques. Risk retention means accepting the risk and budgeting for potential losses, while risk avoidance involves eliminating activities that could introduce the risk entirely. Risk reduction seeks to minimize the risk's potential impact or likelihood through various strategies, but it does not involve sharing the financial responsibility with others. Hence, risk transfer is the correct technique that involves sharing the risk of loss with other parties.