Transfer of Risk

What Does Transfer of Risk Mean?

Transfer of risk, in the context of insurance, refers to the underlying principle of insurance policies, which involves passing a specific risk detailed in the insurance contract from one party, the insured, to another party, the insurer, who takes on the risk for a fee known as a premium.

Insuranceopedia Explains Transfer of Risk

For example, the purchase of an auto insurance policy transfers the risks of owning a vehicle to an insurance company. In the event of a collision or another damaging event, such as extreme weather, the latter pays out a sum to cover repair or replacement costs as specified in the policy.

Insurance companies might also buy reinsurance to transfer some of the risk they take on from their policyholders.