What is Risk Transfer?

http://www.investorwords.com/ defines this as: "Shifting risk from one party to another; examples include purchasing insurance coverage or issuing debt."

The whole basis for insurance is risk transfer. You can move known, definable risks from you to a third party who is more capable of surviving the risk, if a negative event occurs.

Insurance companies were formed to pool the risks and the monies charged(premium) so that they can pay for the repairs in the event any of the insured parties suffers a covered claim.

Almost any type of risk can be transferred to another party. This is good and bad. It is good because no matter how exotic the coverage needs to be, it can be purchased. It is bad because the flexibility of the policy structure allows policies that seem similar to provide very different coverages, which may cause confusion for an insured over what is and is not covered.

The cost of risk transfer (insurance policies) is determined by a few things:
1) How common is your risk? Usually, the more of them there are, the more comfort a carrier will have with the risk, leading to reduced pricing.

• Homeowners insurance is very common. It is fairly easy for insurance companies to predict the statistical averages for claims and payments so they can rate their policies pretty tightly. There is also a lot of competition between insurance companies, so this helps keep prices down.
• On the other hand, if your in a business that is a completely new field, finding a carrier willing to provide a quote will become very difficult. This wil llimit competition, and also because there will be many knowns for the insurance company, the pricing they provide may be reflective of their uneasiness with your business.

2) How hazardous is the risk? Typically, the more hazardous your risk is, the more premium you can expect to pay.

• Do you shine shoes for a living? How likely would you to be sued?
• What if you operate a playground, where there are children running around all day long?
• Do you manufacture dynamite? Even if your product is used as its designed, you may still generate claims with this class of business. I would imagine insurance for a dynamite factory will be a touch more expensive than for a shoe shining business.

3) How broad is the coverage? You get what you pay for. The more coverage you want, the more it will cost.

• If you operate a business and are paying a very small amount versus your friends in the same business, I would be very curious to take a look at yur poicy wording and see if there are any substantial restrictions that you should be aware of.
• It would be very bad if your dynamite factory had an exclusion for fire and explosion.

If you have additional questions, please feel free to contact me.

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Jonathan S. Carroll, ASLI, CRIS
Bradley & Parker
320 S. Service Rd, Melville, NY 11747
O - (631) 981-7600
D - (631) 650-4034
C - (917) 376-0075
F - (631) 981-7681