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CMA Final · Strategic Performance Management and Business Valuation · Corporate Risk Management Performance

Which of the following is an example of risk transfer rather than risk avoidance, reduction or retention?

Buying a fire insurance policy is risk transfer because the financial burden of loss passes to the insurer. Staying out of a market is avoidance, installing sprinklers is reduction, and funding losses from an internal reserve is retention.

  1. ABuying a fire insurance policy on a factory buildingCorrect
  2. BDeciding not to enter a politically unstable market
  3. CInstalling sprinklers in the factory
  4. DSetting aside a reserve to meet small losses from own funds

Explanation

Insurance shifts the financial consequence of loss to the insurer, which is risk transfer. Not entering a market is avoidance, sprinklers are reduction and a self-funded reserve is retention.

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