Answer:
In summary, insurance is a risk transfer mechanism because it allows individuals and businesses to shift the financial burden of unexpected events or losses from themselves to an insurance company, thus protecting them from the potential financial impact of such events.
Step-by-step explanation:
When we say that insurance is a risk transfer mechanism, we mean that insurance allows individuals and businesses to transfer the financial risk of unexpected events or losses from themselves to an insurance company.
Insurance works by pooling the risks of many individuals or businesses together, so that the financial impact of an unexpected event or loss is spread out among many people. When an individual or business purchases insurance, they pay a premium to the insurance company in exchange for protection against specific risks. If a covered event or loss occurs, the insurance company will pay out a benefit to the policyholder to help cover the costs of the loss.
By transferring the financial risk of unexpected events or losses to an insurance company, individuals and businesses are better able to manage and plan for the potential financial impact of such events. Without insurance, an unexpected event or loss could cause significant financial hardship for an individual or business, making it difficult for them to recover. With insurance, however, the financial impact of such events is greatly reduced, allowing individuals and businesses to maintain their financial stability in the face of unexpected events.
In summary, insurance is a risk transfer mechanism because it allows individuals and businesses to shift the financial burden of unexpected events or losses from themselves to an insurance company, thus protecting them from the potential financial impact of such events.