Transfer Of Risk

  

Categories: Insurance

You're walking through wolf-infested woods with a large package of raw meat in your backpack. You start to get a little nervous, so you move the meat to someone else's pack. Transfer of risk.

The financial version of the term works much the same way. The goal is to move the consequence of an unfavorable event onto someone else. Something goes wrong, but you don't have to pay for it. Someone else does. That situation defines a transfer of risk.

The most obvious example involves insurance. When you get an insurance policy, you're effectively conducting a transfer of risk. Now, if your car gets wrecked in an accident, or your house gets wrecked by a coordinated beaver attack, you don't have to pay to get it repaired. The insurance company does.

Insurance companies pull this maneuver as well. They don't just sit on all the risk they have. They look to transfer it. So insurance firms enter into reinsurance contracts with other companies, transferring a portion of their risk onto another firm.

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Finance: What is Event Risk?6 Views

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Finance a la shmoop what is event risk risk risk risque er yeah,

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how'd that get in here all right moving on investing carries all kinds of risk

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low risk paper yes their investments always pay back but while they only get

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like 2% kind of returns and in a world of 3% inflation well that's a big

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well you might own stock in a great company that in a bad market gets taken

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short-term losses you've suffered so if these are normal risks that happen all

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the time they're things that just go on and on it's all part of the investing

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world then what's an event risk which implies that something happened there

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was a vent there was a finite period of time a finite situation that made bad

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the time that's an event right it's a one-time thing well here's an event a

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meteor hits the earth and all of a sudden while the most prized possessions [Meteor strikes earth]

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are simple things like water and gas and land with wood and animals yeah that's

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Korea nuking us yeah not like one in a gazillion chance probably well more

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bunch of other formerly perceived as bulletproof financial institutions yes

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