CFA Level I · CFA Level I Exam · Introduction to Risk Management
A company decides to buy insurance against fire damage to its factory rather than accept the loss itself. This response to risk is best described as:
Buying insurance is best described as risk shifting, also called risk transfer. The company passes the financial consequence of a fire loss to the insurer in exchange for a premium. Avoidance would mean not undertaking the activity, and acceptance would mean retaining the risk.
- Arisk shiftingCorrect
- Brisk avoidance
- Crisk acceptance
Explanation
Buying insurance transfers the financial consequences of the loss to an insurer, which is risk shifting. Avoidance would mean not operating the factory, and acceptance would mean bearing the loss.
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