Which method can be used to transfer risk?

Transferring risk involves shifting the financial burden of potential losses from an individual or organization to another party. Insurance policies are a primary means of achieving this because they provide financial protection against specific risks, such as property damage, liability claims, or unforeseen events. By purchasing insurance, the insured pays a premium, which allows them to shift the financial risk associated with losses to the insurer. In this arrangement, the insurer takes on the responsibility of compensating the insured in the event of a covered loss, effectively mitigating the financial impact on the insured.

Savings accounts, while a valuable financial tool, do not transfer risk; instead, they provide a way to save for future expenses. Investments expose an individual to risk rather than transferring it, as their value can fluctuate based on market conditions. Legal contracts can establish terms and responsibilities between parties, but they do not inherently provide financial protection against losses like insurance policies do. Therefore, the ability of insurance policies to offer coverage and compensation clearly illustrates their role in transferring risk effectively.