Insurance is an example of which type of risk management technique?

Insurance exemplifies the transfer of risk because it allows individuals and organizations to shift their potential financial losses associated with specific risks to an insurance company. When one purchases insurance, they are paying a premium to the insurer in exchange for the promise that the insurer will cover certain losses or damages that may occur, such as property damage, liability, or medical expenses. This transfer functions by protecting the insured from the financial burden of significant losses, thereby managing their risk exposure effectively.

In this context, the policyholder retains their obligation to pay the premium, but the financial risk of certain adverse events is moved away from them to the insurer. The insurance company prepares to absorb these risks, pooling resources from many policyholders to cover the losses that may arise. This overarching principle makes insurance a core example of risk transfer in risk management practices.