Risk transfer

A risk transfer occurs when one party deliberately shifts risk to a different entity, usually by purchasing an insurance policy. This risk may be shifted further, from an insurer to a reinsurer, so that the original insurer does not accumulate too much of a particular type of risk. An example of a risk transfer is when a doctor purchases malpractice insurance to transfer the risk from any losses incurred from patient lawsuits. 

Risk may also be transferred through contractual agreements with a firm's business partners. For example:

  • The partners in a joint venture can agree to share any losses arising from the venture.

  • A customer demands a one-year warranty on a product purchased from a supplier, which shifts the risk of product failure to the supplier for that one-year period.

  • Demand that the business to be named as an additional insured on another party's insurance policy, thereby extending insurance coverage to the business.

  • Insist that a hold-harmless clause be inserted into all contracts signed with other parties, which protects the organization from the acts or omissions of the other parties.

  • Require contractors to submit a certificate of insurance, which provides proof of their coverage. Otherwise, the company may be assuming risk if the contractor is responsible for injuries or damage.

Related Courses

Business Insurance Fundamentals 
Enterprise Risk Management