PMI Risk Management Professional Practice Exam

What does purchasing earthquake insurance for a project exemplify in risk management?

1. Risk avoidance

2. Risk mitigation

3. Risk transference

4. Risk acceptance

The correct answer is: Risk transference

Purchasing earthquake insurance for a project exemplifies risk transference. This concept involves shifting the financial burden of a risk to another party, in this case, an insurance company. By acquiring insurance, the project owner transfers the potential financial losses associated with earthquake damage to the insurer. This means that if an earthquake occurs and causes damage, the insurance company will cover the costs, thereby protecting the project's budget and financial stability. Risk transference does not eliminate the risk itself; rather, it places the responsibility for managing the financial implications of that risk onto another entity. This strategy allows organizations to better manage their risk exposure while still taking on the possibility that an earthquake could occur. It is a common practice in risk management to ensure that potential losses do not have a crippling effect on the project’s overall success.