What is the term for shifting the financial consequences of risk to another party?

Prepare for the Washington Property and Casualty Test. Study with flashcards and multiple choice questions, each question has hints and explanations. Get ready for your exam!

The term for shifting the financial consequences of risk to another party is risk transfer. This concept is fundamental in risk management strategies where an individual or organization purchases insurance or enters into contracts to mitigate potential losses by transferring the financial burden to an insurance company or other third party.

In practice, risk transfer allows an entity to manage its exposure to various risks, which can include property damage, liability claims, or business interruption. By doing so, the entity reduces its potential financial impact in the event that a risk materializes. This is why businesses often utilize insurance policies as a form of risk transfer, ensuring that they are financially protected against unexpected events.

Self-insurance refers to the practice of setting aside funds to cover potential losses without transferring the risk to an insurer, thus it does not involve transferring the financial consequences. Risk retention involves accepting and managing the risk internally without any transfer, while risk avoidance entails eliminating the activities that lead to exposure in the first place, rather than transferring the risk to another party. These distinctions highlight why risk transfer is the correct answer in the context of the question.

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