Which of the following is the best example of transferring risk to another party?

• A. Retaining all risk through self-insurance
• B. Increasing production to spread risk
• C. Diversification across product lines
• D. Purchasing insurance

Answer: (D)

Transferring risk to another party means shifting the potential financial burden of losses away from your business to someone else. Buying insurance does exactly that: you pay a premium, and the insurer agrees to cover specified losses within the policy terms. The insurer bears the financial risk for those covered events, not you, up to the policy limits.

The other options keep the risk on your side. Self-insuring means you fund any losses yourself, so nothing is transferred. Increasing production to spread risk reduces the impact of a downturn by operating more units, but the business still bears the risk. Diversification across product lines lowers exposure to a single product’s failure, yet the risk remains with the company, just in different areas. Therefore, purchasing insurance is the clearest example of transferring risk to another party.