In risk management, how is 'insurance' defined?

In risk management, insurance is primarily defined as a strategy for risk transfer through premium payments. This means that individuals or organizations pay a premium to an insurance company in exchange for financial protection against potential losses or damages that may arise from specific risks. By purchasing insurance, the insured party shifts the financial burden of certain risks to the insurer, which can help mitigate the impact of unforeseen events such as accidents, property damage, or liabilities.

This mechanism allows businesses and individuals to manage risks more effectively by providing a safety net, ensuring that they are financially equipped to recover from adverse events. It creates a predictable cost (the premium) for the insured while the insurer assumes the variability of potential losses. This practice is fundamental in risk management as it helps individuals and organizations maintain stability in their financial planning and operations.

In contrast to the other options, risk avoidance involves strategies aimed at eliminating risks rather than transferring them, enhancing risk exposure refers to actions that would increase vulnerability to risk, and internal controls focus on operational efficiencies and compliance rather than outright risk transfer.