What is the term that describes the act of insuring a risk against possible loss?

The act of insuring a risk against possible loss is termed risk transfer. This concept refers to the practice of shifting the financial burden of a potential loss from one entity to another, typically from individuals or businesses to an insurance company. When a policyholder purchases insurance, they transfer the risk of specific financial losses to the insurer, who agrees to compensate the policyholder in the event that a covered loss occurs.

In the context of risk management, this process allows individuals and businesses to protect themselves from the financial consequences of unforeseen events, such as accidents, natural disasters, or other liabilities. By paying premiums, they exchange a certain, manageable cost for the uncertainty of a potentially larger loss. This helps in promoting financial stability and peace of mind, knowing that they have a safety net in place.

Other options, like risk avoidance, entail entirely eliminating the risk rather than insuring against it, while risk pooling or sharing distributes risk among a larger group. Risk retention means accepting the risk and bearing any financial losses that occur instead of transferring them. These approaches serve different strategic purposes in risk management but do not specifically involve insuring against loss as risk transfer does.