'Risk Transfer' in Insurance Transactions - 趙永祥的數位歷程檔

"Risk Transfer" had been commonly accepted in the underlying tenet behind insurance transactions. The purpose of this action is to take a specific risk, which is detailed in the insurance contract, and pass it from one party who does not wish to have this risk (the insured) to a party who is willing to take on the risk for a fee, or premium (the insurer).

Risk transfer is a risk management and control strategy that involves the contractual shifting of a pure risk from one party to another. One example is the purchase of an insurance policy, by which a specified risk of loss is passed from the policyholder to the insurer. Other examples include hold-harmless clauses, contractual requirements to provide insurance coverage for another party's benefit and reinsurance. When done effectively, risk transfer allocates risk equitably, placing responsibility for risk on designated parties consistent with their ability to control and insure against that risk. Liability should ideally rest with whichever party has the most control over the sources

of potential liability.

For example, whenever someone purchases home insurance, he or she is essentially paying an insurance company to take the risk involved with owning a home. In the event that something does happen to the house, such as property damage from a fire or natural disaster, the insurance company will be responsible for dealing with any resulting consequences. In addition, in today's financial marketplace, insurance instruments have grown more and more intricate and complex, but the transfer of risk is the one requirement that is always met in any insurance contract.

According my recognition, the term, 'risk transfer' has been used in US Tax Court and US Supreme Court cases to describe an important concept. Risk transfer and risk distribution, are the generally accepted circumstances required for an insurance transaction to exist. I fully understand and agree. In our normal life, risk transfer is occurred in transaction behavior, the transaction is still one of risk transfer; the quality (or lack thereof) of the risk-taking party doesn't change that fact. We can understand that 'risk transfer' can be viewed as the reduction of risk to a position by buying an insurance policy or taking an offsetting position. For example, a person may reduce the risk of loss due to medical expenses by buying health insurance. Likewise, a person may reduce the risk of loss to a long position by entering an equal but opposite short position.

Sincerely,

Dr. Chao Yuang Shiang