CFA Level I · CFA Level I Exam · Introduction to Risk Management
A company buys a property insurance policy for its warehouse and pays an annual premium. In return, the insurer will compensate it for covered fire damage. This action is most likely an example of:
This is risk transfer. By paying a premium, the company passes the financial burden of covered fire losses to the insurer. The warehouse is still held, so the risk is not avoided, and nothing is diversified or reduced in probability by the policy itself.
- ARisk transferCorrect
- BRisk avoidance
- CRisk mitigation through diversification
Explanation
Insurance moves the financial consequence of a covered loss to the insurer in exchange for a premium, which is risk transfer. The company still owns the warehouse, so the risk is not avoided, and no diversification takes place.
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