Arizona Life and Health Practice Exam

What insurance concept involves sharing an uncertain risk with another similar group?

1. Risk assessment

2. Transfer

3. Underwriter

4. Exposure

The correct answer is: Transfer

The concept of sharing an uncertain risk with another similar group is most accurately described by transfer. In insurance, risk transfer occurs when an individual or entity shifts the financial burden of potential losses to an insurer or a group of similar risk-bearing entities. This allows groups of insured individuals to share the risk among themselves, pooling their resources so that when one member experiences a loss, the financial impact is mitigated by the contributions of all members of the group. Insurance operates on the principle that many individuals pay premiums (the shared contribution), and this aggregate can be used to cover the losses of a few. On the other hand, risk assessment refers to the process of evaluating the likelihood and potential impact of risks but does not involve the sharing of risk among groups. An underwriter is responsible for evaluating and accepting risks for insurance indemnification; this role focuses more on the selection and pricing of insurance policies rather than the sharing aspect. Lastly, exposure refers to the potential for loss or damage that could occur due to certain risks, which is a component of risk management rather than a method of sharing uncertain risks.