Final answer:
The act of buying insurance to safeguard against potential financial losses is known as risk transfer. It is a strategy used to mitigate the impact of potential catastrophic events by transferring the risk to an insurance company. This concept is closely related to 'moral hazard', where insured individuals or companies might take greater risks due to the safety net provided by insurance.
Step-by-step explanation:
The response to dealing with risks by buying insurance to protect your bottom line is known as risk transfer. Insurance allows you to transfer the financial risk to the insurance company, ensuring that in the case of a disaster or threat, you are not solely responsible for the financial repercussions. This mechanism is particularly relevant in cases where the potential threats could have catastrophic outcomes, even if the probability of the threat occurring is low.
Furthermore, the concept of moral hazard arises in this context, as those with insurance may engage in riskier behavior than they would without it, knowing they are somewhat protected against loss. It's also essential to consider how insurance companies manage risks through practices such as separating buyers into risk groups and using government regulations to ensure a stable insurance market.