What is the mechanism called that involves the purchase of insurance to transfer risk?

The mechanism that involves the purchase of insurance to transfer risk is referred to as the "transfer of risk." This concept is fundamental to the insurance industry, where individuals or organizations buy insurance policies to protect themselves from potential losses. By purchasing insurance, the risk of financial loss due to unforeseen events – such as accidents, natural disasters, or liability claims – is transferred from the insured party to the insurer.

This transfer allows the insured party to mitigate their exposure to risk, as the insurer assumes the responsibility for financial compensation in the event of a covered loss. As a result, individuals and businesses can operate with more stability and confidence, knowing they have a safety net in place.

While self-funding refers to the practice of setting aside reserves to cover potential losses and speculative risk pertains to investments that have the potential for loss or gain, these concepts do not encompass the direct mechanism of transferring risk through the purchase of insurance. Reinsurance, on the other hand, involves insurers transferring some of their own risk to other insurance companies, which is a concept that operates within the insurance industry rather than the primary action taken by consumers to manage their own risk. Hence, the correct reference to the mechanism of transferring risk to an insurer is aptly termed "transfer of risk."