A risk management technique via which risk is transferred to a third party is known as risk transfer. In effect, one party assumes the liabilities of another. A common example of risk transfer is the purchasing of insurance – this involves the transfer of risk from an entity or individual to an insurance company.
What Are the Methods of Transferring Risk?
Insurance policies are one method of transferring risk. Should the risk event occur, the insurance company that has provided the policy will assess its causes and attendant losses to determine the compensation to be paid (or otherwise) to the policy holder.
Adding an indemnification clause to a contract is another method whereby risk can be transferred. Insurance specialists such as Rob Tolley (former London broker) understand that such clauses ensure that the other party provides compensation regarding potential losses suffered by the entity or individual.
Derivatives are financial products that take their value from an underlying asset. Organisations can use these products to hedge against specific financial risks. For example, a company could purchase a derivative with a view to protecting itself from financial risks connected with changes to currency exchange rates.
Finally, as a method of risk transfer, outsourcing allows an entity to transfer risk to a third party that is dealing with a process or project. Should the risk event occur in the process of execution, this external party bears the responsibility for the losses – meaning that the organisation is saved from an unplanned expense.
Employing Risk Transfer as Strategy for Protection
To establish an effective risk transfer strategy, organisations should focus on a few key areas. The first of these involves certificates of insurance, which should be required from tenants, subcontractors, service providers and other parties. Accepting these certificates only from the relevant insurance company or agent can protect against being presented with a false document.
Additional insured status could also be requested from tenants, subcontractors, service providers and other parties. This can act as a safety net in the event that indemnity provisions are unenforceable.
It’s important to carefully consider contracts that others are asked to sign as part of a risk-transfer strategy. Written contracts should always be secured, and a contract or purchase order should include a hold-harmless clause as protection from the acts or omissions of the other party. This document should also require that the organisation be named as an additional insured under their general liability policy.
For more information about risk transfer strategies, take a look at the embedded PDF.
