Page 58 - RISK Management IC86 Ebook
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Risk Management
Moral hazard
n Insurance coverage reduces the insured's incentives to prevent
loss or to contain the amount of damage due to the loss when
it occurs. In certain cases, there can be intentional damages
created by the insured themselves, such as arson or staging
accidents or hospitalization when not required etc.
n Overall, the advantages that the insurance mechanism provides
are much more than the effects of the disadvantages discussed
above, in most of the cases.
Risk transfer
n The most common form of risk transfer is insurance. By
payment of a premium, the financial consequences of the risk
are effectively transferred to another party, the insurer.
Risk financing
n Primary objective of risk financing is to spread the cost of
risks more evenly over a period of time, in order to reduce the
financial strain and possible insolvency, which the random
occurrence of large losses may cause. The secondary objective
is to minimize risks costs.
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