Previous Year Question

Correct answer: A — Risk transfer

Identifying the risk response in the case study

The agricultural business faces crop failure caused by adverse weather. The action described is the purchase of insurance coverage. Insurance creates a contract under which the business pays a premium and the insurer agrees to meet covered losses, subject to the policy conditions.

To classify this action, identify what has changed. The business still grows crops and remains exposed to adverse weather. Buying the policy does not itself prevent drought, heavy rainfall or crop damage. What changes is who bears the covered financial loss after the insured event occurs. This shift of financial responsibility is risk transfer.

For example, if a covered crop-loss claim is accepted, the insurer pays according to the agreed cover. The business may still retain a deductible, losses above the sum insured, excluded events or other uncovered expenses. Risk transfer can therefore be partial; it does not mean that every consequence of the event has disappeared.

In this question, the decisive evidence is the insurance contract. The premium is the cost of arranging the transfer, while the insurer’s obligation to compensate covered loss is the mechanism that makes it a risk-transfer response.