Transfer Of Risk

What Does Transfer Of Risk Mean?

Transfer of risk, in the context of insurance, is the fundamental 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.

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