Which statement describes a funded risk transfer measure?

Which statement describes a funded risk transfer measure?

• A. It does not involve funding.
• B. It is funded by reserves and involves setting aside funds.
• C. It reduces the risk to zero.
• D. It is funded by borrowing.

Answer: (B)

Funded risk transfer means pre-funding the potential losses by setting aside capital in a dedicated reserve or funding mechanism. This approach transfers the financial burden of losses to the fund you’ve created, rather than relying on external insurance or pay-as-you-go funding. Describing it as “funded by reserves and involves setting aside funds” matches this concept precisely: money is put aside now to cover future claims. The other options don’t fit because not funding implies unfunded retention, which isn’t a funded approach; assuming risk will go to zero is unrealistic—some residual risk always remains; and borrowing to fund would mean debt financing, whereas funded risk transfer emphasizes using existing reserves or capital rather than incurring new borrowings.

Funded risk transfer means pre-funding the potential losses by setting aside capital in a dedicated reserve or funding mechanism. This approach transfers the financial burden of losses to the fund you’ve created, rather than relying on external insurance or pay-as-you-go funding. Describing it as “funded by reserves and involves setting aside funds” matches this concept precisely: money is put aside now to cover future claims.

The other options don’t fit because not funding implies unfunded retention, which isn’t a funded approach; assuming risk will go to zero is unrealistic—some residual risk always remains; and borrowing to fund would mean debt financing, whereas funded risk transfer emphasizes using existing reserves or capital rather than incurring new borrowings.