Transfer Of Risk

What Does Transfer Of Risk Mean?

Transfer of risk, in the context of insurance, is the principle whereby a specific risk outlined in the insurance contract is shifted from one party, the insured, to another party, the insurer. In exchange for assuming this risk, the insurer charges a fee known as a premium.

Insuranceopedia Explains Transfer Of Risk

For example, purchasing an auto insurance policy transfers the risks associated with owning a vehicle to the insurance company. In the event of a collision or another damaging event, such as extreme weather, the insurer pays a sum to cover repair or replacement costs as specified in the policy. How each carrier prices and pays out on those claims is what gives the risk transfer its real value, which is why it pays to compare options across the best car insurance companies before settling on one.

The size of that premium depends on how much risk the insurer thinks it is taking on, which is why two people buying the same type of policy can pay very different rates. Many of the same inputs show up across product lines, including the factors that drive life insurance premium costs.

Additionally, insurance companies may buy reinsurance to transfer some of the risks they assume from their policyholders, thereby spreading the potential financial burden.