Risk Transfer

What Does Risk Transfer Mean?

A risk transfer occurs when one party pays a specified amount to another party in exchange for the second party assuming a risk on their behalf.

The insurance industry is fundamentally based on risk transfer: by purchasing an insurance policy, the policyholder shifts the financial risk to the insurer.

Insuranceopedia Explains Risk Transfer

People often engage in risk transfer by purchasing insurance when they anticipate that managing certain risks on their own could be too costly. For instance, healthcare expenses can be overwhelming and unpredictable, leading many individuals to buy health insurance policies to help cover and manage these potential costs. The same logic applies when people compare types of car insurance to handle collision and liability risks, or buy life insurance so a death doesn’t leave their family without income.