The correct answer is D. Transferring risk.
Insurance is
a contract between an insurance policy holder and an insurance company, where the policy holder agrees to pay a premium in exchange for the insurance company’s promise to pay a specified amount of money (the benefit) in the event that a covered event (the insured event) occurs.Insurance allows companies to manage risk by transferring the risk of loss from the company to the insurance company. This can be a very effective way to manage risk, as the insurance company is typically much better equipped to handle large losses than a single company.
The other options are incorrect because they do not accurately describe how insurance allows a company to manage risk.
Option A, “By avoiding risk,” is incorrect because insurance does not prevent companies from taking on risk. In fact, insurance can actually encourage companies to take on more risk, knowing that they will be protected in the event of a loss.
Option B, “By modifying risk,” is incorrect because insurance does not change the nature of the risk. The risk of loss still exists, but it is transferred from the company to the insurance company.
Option C, “By preventing risk,” is incorrect because insurance does not prevent losses from occurring. It simply provides financial protection in the event that a loss does occur.