Purchasing insurance is an example of which type of risk management?

The choice of transference as the correct answer is based on the concept of transferring risk from one entity to another. When an individual or organization purchases insurance, they are shifting the financial burden of potential loss to the insurance company. This means that rather than facing the cost of a claim directly, the insured pays a premium to the insurer, who then assumes the risk associated with specific events or losses.

Transference effectively protects the insured from the immediate impact of financial loss, allowing them to plan and budget more effectively since they know that the insurance company will provide compensation in the event of a covered loss. This method of risk management is fundamental in various areas, such as health, property, and liability insurance.

To further clarify, avoidance refers to strategies that eliminate risk entirely by not engaging in risky activities, which is not applicable when buying insurance. Retention involves retaining the risk, meaning the insured would pay for any losses out of pocket rather than transferring that risk to an insurer. Sharing involves distributing the risk among multiple parties, which is not the case in a typical insurance contract setup where one party (the insurer) takes on the risk from the insured.