{"id":352593,"date":"2017-06-05T14:33:27","date_gmt":"2017-06-05T19:33:27","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/consumer\/insurance\/insurance-and-the-transfer-of-risk.html"},"modified":"2024-06-21T12:58:06","modified_gmt":"2024-06-21T17:58:06","slug":"insurance-and-the-transfer-of-risk","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/consumer\/insurance\/insurance-and-the-transfer-of-risk.html","title":{"rendered":"Insurance and the Transfer of Risk"},"content":{"rendered":"\n
\n \n
\n

Insurance and the Transfer of Risk<\/h1>\n
\n
\n By Oni Harton, J.D.<\/a> | Legally reviewed by Melissa Bender, Esq.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

Many people buy insurance<\/a> to gain security and peace of mind. Comprehensive insurance policies can protect our assets, health, and loved ones’ financial well-being. Insurance coverage involves allocating risk between the insurance company and policyholder.<\/p>\r\n

This article explains how the insurance industry handles the transfer of risk. It also briefly discusses how this risk allocation works in several situations. For more insurance information, visit FindLaw’s Insurance<\/a> page.<\/p>\r\n

How Risk Transfer and Allocation Works in Insurance<\/h2>\r\n

The transfer of risk is an essential tenant of insurance contracts. When you purchase an insurance product, the insurance company takes on certain obligations under the written contract. The insurance company will agree to indemnify<\/a> you for a certain amount of loss up to the policy limits.<\/p>\r\n

The insured agrees to pay an insurance premium for the insurer’s protection. An insurance policy is a legally binding contract. It effectively passes the risk from the party who doesn’t want to take it on (the insured or purchaser of the policy) to the party willing to take it on. The insurance company agrees to take on the risk for a fee.<\/p>\r\n

For example, if you buy a home, you’ll likely also purchase a homeowners insurance<\/a> policy. With your purchase, you pay the insurance company to take on various risks that come with homeownership. The insurance underwriting process determines whether the insurer will write a policy for the customer and, if so, the premium cost.<\/p>\r\n

Risk Pooling<\/h3>\r\n

Risk can be transferred from insured individuals to insurance companies. Insurers can also transfer risk to reinsurers. This is known as "risk pooling." An insurance company collects millions of dollars in premium payments each year. The company spends this income to meet company expenses and pay out insurance claims.<\/p>\r\n

The company calculates premiums using actuarial statistics and other data. Prudent risk management requires insurance companies to ensure that the amount of premiums collected exceeds the amount the company pays out.<\/p>\r\n

Reinsurance Companies<\/h3>\r\n

The dollar value of the risk insurance companies typically take exceeds the capital they maintain to pay out for claims. Insurance companies often pass some risk to reinsurance companies to ensure they meet payment obligations for claims.<\/p>\r\n

Reinsurance provides insurance companies with insurance against loss, helping to protect against catastrophic loss. For example, there can be widespread property damage and bodily injury claims when a large-scale natural disaster occurs. Such an event would cause insurers to issue many payments at once. A reinsurer helps an insurance company manage its risks.<\/p>\r\n

Insurance Meets Needs During Life Events<\/h2>\r\n

Different types of insurance policies<\/a> guard against any number of risks. Insurance agents are an excellent resource for exploring insurance policies. They can help you with common types of insurance for you or your small business, including the following:<\/p>\r\n