Life & Health Insurance Practice Exam 2026 - Free Practice Questions and Study Guide

The act of shifting the responsibility of risk to another party is referred to as risk transfer. In the context of insurance, this involves an individual or entity purchasing an insurance policy to manage potential financial losses that could arise from certain risks, such as accidents, health issues, or property damage. When a policyholder pays a premium, they transfer the financial burden of specific risks to the insurance company. This mechanism allows individuals and businesses to protect themselves from unpredictable losses, thereby providing peace of mind and financial security.

Risk acceptance involves acknowledging the potential consequences of a risk and deciding not to take any action to mitigate it, which is not applicable in the context of transferring risk. Risk retention relates to keeping the risk and absorbing any related losses, which is contrary to the concept of transferring risk. Risk aversion is a preference for avoiding risk altogether, rather than taking measures to manage or transfer it. Therefore, the correct interpretation of the act of shifting responsibility of risk to another party is clearly denoted by the term risk transfer.