Final answer:
A company purchasing insurance to reduce threat losses is practicing risk transfer. Insurance protects against financial loss through premiums which are allocated based on risk probability. However, raising premiums due to losses can lead to fewer low-risk policyholders, destabilizing the insurance pool.
Step-by-step explanation:
When a company decides to reduce losses of a threat by purchasing insurance, this process is known as risk transfer. Insurance is a method of protecting a person or business from financial loss. Policyholders make regular payments, called premiums, to an insurance company. The insurer then sets these premiums based on the probability of certain events occurring within a group of insured individuals or entities. If any member of the group suffers significant financial damage from an event covered by the policy, they receive compensation from the pool of collected premiums.
However, there can be consequences such as moral hazard, where individuals may take greater risks because they have insurance coverage. Moreover, if an insurance company faces considerable losses and raises its premiums to cover these, it may discourage lower-risk individuals from purchasing insurance, potentially unbalancing the risk pool.