Certified Financial Consultant (CFC) Practice Exam

Which insurance concept describes the transfer of risk from the policyholder to the insurer?

1. Deductible

2. Policy limits

3. Risk pooling

4. Underwriting

The correct answer is: Risk pooling

The concept that describes the transfer of risk from the policyholder to the insurer is risk pooling. This principle works by gathering a large number of policyholders into a common fund, which allows the insurer to spread out the risk of individual losses. When the policyholder pays insurance premiums, they are essentially buying a promise from the insurer to cover certain losses depending on the terms of the policy. When losses occur, the collective contributions of all policyholders are utilized to pay out claims, effectively sharing the risk among the group. This makes it financially viable for both the insurer and the insured; the insurer has a larger base to pull from for payouts while the policyholder has a safety net protecting them against significant financial loss. The other options do not correctly describe the transfer of risk. A deductible is the amount the policyholder must pay before the insurer kicks in, policy limits are the maximum amount an insurer will pay for a covered loss, and underwriting is the process of evaluating risks and determining the terms of coverage.