ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -As outlined above, purchasing insurance is a common method of transferring risk. When an individual or entity is purchasing insurance, they are shifting financial risks to the insurance company. Insurance companies typically charge a fee – an insurance premium – for accepting such risks.

Detailed explanation-2: -Risk shifting transfers risk or liability from one party to another. Risk shifting is common in the financial world, where certain parties are willing to take on others’ risk for a fee. Insurance, for instance, transfers the risk of a loss from the policyholder to the insurer.

Detailed explanation-3: -By transferring the risk to an insurer, it becomes possible to enjoy peace of mind, invest funds that would otherwise have been set aside as a reserve, and plan one‟s business more effectively. It is precisely for these reasons that insurance is needed.

Detailed explanation-4: -Risk transfer can be of mainly three types, namely, Insurance, Derivatives, and Outsourcing.