What is the most common method of handling risk in insurance?

The transfer of risk is the most common method of handling risk in insurance primarily because it aligns with the fundamental purpose of insurance itself. Insurance functions by pooling the risks of multiple individuals or entities, thereby allowing them to share the financial burden of potential losses. When a person or business purchases insurance, they transfer the financial responsibility of specific risks (such as property damage, liability, or health issues) to the insurance company. This means that in exchange for a premium, the insurer agrees to cover losses incurred by the insured under the terms of the policy.

This method offers a systematic approach, allowing individuals and businesses to protect themselves from substantial financial impacts of unforeseen events. By transferring risk, policyholders can avoid the potentially devastating effects of large financial losses, facilitating stability and security in their personal and business lives. In contrast to other risk management techniques, such as retention or avoidance, transferring risk through insurance is widely adopted and provides a structured method for mitigating risk exposure.