Page 21 - RMAI BULLETIN Jan - Mar 2020

RMAI BULLETIN JANUARY TO MARCH 2020

It is the process by which the activities that creates risk Commercial insurance is a technique of transferring
istransferred–like- risk from one party (individual or business) for whom
1. Transferring of the process like – engaging a sub- the risk is costly to another party who is willing and is
contractor for processing hazardous substances or able to bear the risk. Insurance is thus one of a number
the hazardous processes like spray painting / in a of available instruments for hedging risk. It is an
marriage ceremony we now engage professional instrument for post loss financing. Purchase of medical
caterers for arranging the meals for the guests & insurance is an appropriate strategy for controlling loss
relatives–therebytheresponsibilityistransferred. exposuresthathaveahighseverityoflosscoupledwith
a low probability of loss. It is not proposed to discuss
2. Transferring the activities by contract – like
engaging a contractor for constructing your house here the important principles underlying the
within your budget. Contractor should insure the mechanism of insurance, such as principle of
entire project covering all the sources of damages, indemnity, principle of insurable interest, the concept
possible material losses and related third party of beneficiary, the principle of subrogation, and the
principle of utmost good faith, as they are covered in
liabilities to others (even covering the
contingenciesrelatedtohisemployees). materialrelatingtoinsurance.

3. Insuranceisthebestmethod&adequatemeasures Insurance as an economic institution operates on the
of risk transfer. Under Risk Transfer, Risk financing
principle of risk pooling and risk reduction, besides a
is included which involves creating special /
mechanism of risk transfer. Pooling is the sharing of
internal funds to meet any unforeseen event.
total losses among a group. The aggregate amount of
Insurance is always recognized as the best method
uncertainty is brought down facilitating risk reduction
ofriskfinancing.
by “combining under one management a group of
objects or persons so that the total losses to which the
Insurance is considered a special form of the technique
insured group is subject becomes predictable within
of risk-transfer. It is, on one side, an economic or social
narrow limits”. Through this process, the overall risk for
institution designed to perform certain special
the group is reduced and the resultant losses are
functions and on the other, as a legal contract between pooled, generally through the method of payment of
two parties, the insured (transferor) and the insurer an insurance premium. Thus, the insured, through the
(transferee). Taking the latter aspect first, in certain
mechanism of insurance, transfer specific risks to the
situations,thebestwaytomanageaparticularriskmay
group and exchange a potentially large and uncertain
be to purchase insurance. This is because of the
loss for a relatively small certain payment, i.e. the
insurer’s ability to efficiently handle risk through the
insurancepremium.
operationoflawoflargenumbers.
Non-insurancetransfers:
It does not, however, imply that an automatic
assumptionthattheonlywaytohandleaparticularrisk They are techniques (other than insurance) by which a
exposure is insurance. Such an assumption is not risk exposure and its potential financial losses are
warranted. Some of the corporate risk managers, in transferred to another party who is in a better position
fact, use insurance as a last resort, when other risk to exercise loss control. A number of instances of non-
management techniques are not considered adequate insurance transfers can be cited. A computer lease
bythemselves. agreement by a firm may contain a clause to the effect
that maintenance, repairs etc., of the computer are the
The size of the potential loss determines the amount of responsibility of the computer firm. A publishing firm
insurance that should be purchased, once a decision is may specify that the author and not the publisher are
made to transfer risk. If the amount of insurance is legally liable for plagiarism, if any. This kind of
higherthanisrequired,thenanindividualorafirmmay arrangementmayincludethefollowing:-
be saddling himself or itself with unwarranted (and 1. HoldHarmlessAgreements;
sometimes, may be unbearable and excessive costs). 2. Diversification;
On the other side, if the amount of insurance
3. Hedging;
purchased is low, then the individual or firm may be
saddledwithunnecessarycosts.
1. Hold Harmless Agreements: Many kinds of

19