Risk transfer is a contract between an entity that takes over a given risk with the entity that transfers it. The content of the contract is an obligation to cover the loss that may occur in the transferring entity as a result materialization of a given risk.
- The risk transfer scope defines the content of the above undertaking
- The transfer is effective as long as the commitment is effective
- Risk transfer is actually replacing one risk with another
The scope in which the risk can be considered as transferred:
- when it was found that the insurance or non-insurance cover was fully met for certain risks selected from the risk map as not subject to retention
- the goal should not be only to minimize the level of the insurance premium, but to minimize the level of the total risk cost, as well as to eliminate the need for unplanned financing of risks from own resources
- there are no gaps in the scope or subject of risk subject to transfer
- there is no risk that the cover has been arranged in a way that does not guarantee its continuity
- has been introduced as part of risk management, risk control, which allows for monitoring them, introducing corrections and additions in covering their transferred part
- means have been provided to cover the retained part of the risk (retention).
Among the consequences that may occur as a result of the implementation of random events, it is possible to distinguish consequences related to :
- loss or damage to property, e.g. fire
- seize, destroy or damage property, e.g. theft
- civil liability for business operations
- liability for the manufactured product
- loss of profit as a result of a business interruption
Accomplishment of risk transfer
Insurance: Risk transfer is usually carried out through an insurance policy. It is an agreement between two entities: an insurance company and the policyholder, but this only occurs when the insurance company accepts defined financial risk from the policyholder. This means that if an employee bears any injuries, the insurance company bears the costs. If the building is destroyed by natural factors, the insurance company will bear the costs associated with bringing this building to its original state. Each insurance company charges a fee for taking over such a risk. What is more, there are many factors that change the financial risk, e.g. reserves, other financial contracts, deductions, reinsurance.
Contracts: There is a possibility of transferring risk not only through insurance contracts but also through agreements containing specific provisions that concern the compensation. Such a provision may be an indemnity clause, which is a contractual provision containing the consent of one entity for liability for damage suffered by the other entity. Such indemnification agreements are independent of the protection provided by the insurance company.
- (M. Pompella, (2017), p. 2- 4)
- (M. G. Cruz, (2015), p. 685-688)
- (R. Hohl, (2018), p. 369-371)
- (M. Frenkel, (2004), p. 439-441)
- Cruz M. G. and others, (2015), Fundamental Aspects of Operational Risk and Insurance Analytics: A Handbook of Operational Risk, John Wiley & Sons, p. 685 - 688
- Frenkel M. and others, (2004), Risk Management: Challenge and Opportunity, Springer Science & Business Media, p. 439-441
- Hohl R., (2018), Agricultural Risk Transfer: From Insurance to Reinsurance to Capital Markets, John Wiley & Sons, p. 369-371
- Pompella M. and others, (2017), The Palgrave Handbook of Unconventional Risk Transfer, Springer, p. 2-4.
Author: Kristina Tyshchenko