A business purchases life insurance on its key employees to fund the financial loss their deaths would cause. This arrangement uses which risk management technique?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Insurance is the classic risk-transfer device: the insured pays a premium and the insurer assumes the financial consequences of a covered loss under the contract. By insuring its key employees, the business transfers the financial impact of losing those employees to the insurer. Avoidance removes the exposure altogether, retention means the firm self-insures and pays losses from its own funds, and reduction involves loss-control measures that lower the chance or size of loss. Only transfer involves an insurer assuming the risk through a policy.
Why the other options are wrong
- B) Avoidance would mean eliminating the exposure entirely, such as deciding never to rely on a single key employee — not purchasing insurance to cover the risk.
- C) Retention means the firm keeps the risk and pays any loss from its own resources, which is the opposite of shifting it to an insurer.
- D) Reduction includes safety programs and loss-prevention measures; buying insurance does not reduce the frequency or severity of a loss, it pays for it.
Memory hook
Insurance = transfer. You pay a premium; the insurer takes the financial hit. Avoid, retain, reduce are the other three doors.