When an individual purchases insurance, which method of handling risk is being utilized?

When an individual purchases insurance, they are utilizing the method of risk transfer. This approach involves shifting the financial burden of potential losses from the individual to the insurance company. By paying a premium, the individual effectively transfers the responsibility of certain risks, such as damage to property or liability for accidents, to the insurer.

This means that when a loss occurs, the insurance company will cover the costs according to the terms of the policy, thereby protecting the individual from significant financial losses. Risk transfer is a fundamental principle of insurance, allowing people and businesses to manage uncertainties by sharing the risk with a larger pool of insured parties. Through this mechanism, individuals can take on risks they might not be able to bear alone, ensuring financial stability in the event of unforeseen circumstances.

The other methods listed, such as risk retention, avoidance, and reduction, indicate different approaches individuals or organizations might take regarding risk management, but they do not involve purchasing insurance to mitigate the financial impact of that risk.