If You Shift Your Risk by Using Other Means to Compensate

question 25

Multiple Choice

If you shift your risk by using other means to compensate for the loss like purchasing insurance, you have implemented a risk _________ strategy.

• A) acceptance
• B) avoidance
• C) limitation
• D) transference

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Definitions:

Moral Hazard

A situation in insurance and contracts where one party takes more risks because they know they are protected or that another party bears the costs of those risks.

Adverse Selection

A situation in financial markets where buyers and sellers have different levels of information, leading to transactions that favor the party with more or better information.

Adverse Selection

A situation where asymmetric information leads to the selection of poor risks, often seen in insurance markets.

Pre-contractual Problem

Issues that arise before the formation of a contract, often relating to the disclosure of information or negotiation terms.