CMA Final · Entrepreneurship and Startup · Risk Management Strategies
A Bengaluru startup selling smart water purifiers buys an insurance policy against fire damage to its warehouse stock. In the standard classification of risk-handling strategies, this is best described as:
The strategy is risk transfer. By paying a premium for a fire insurance policy, the startup shifts the financial burden of a possible warehouse loss to the insurer. It does not avoid the activity, nor does it bear the loss itself, which would be retention.
- ARisk transferCorrect
- BRisk avoidance
- CRisk retention
- DRisk elimination through diversification
Explanation
Buying insurance shifts the financial consequence of a loss to the insurer in return for a premium. That is risk transfer. Avoidance would mean not holding stock at all, and retention would mean bearing the loss from the firm's own funds.
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