Question

Japan Inc. is exporting machinery to a Russian company and needs to get insured because of the political risks involved with doing business in a high-risk country. However, the insurer will not fully cover the insurance needed because of the high risk and will require Japan Inc. to be insured via a risk sharing method. Identify and explain two risk sharing methods

Answer 1

Insurance allows you to transfer risk you cannot afford, or choose not to afford. A homeowners policy transfers the financial risk of rebuilding after a fire to an insurer. Even in situations of risk transfer, it is common to share some risk.

Two Risk sharing methods are as under-

1) Co-insurance-

Coinsurance is the amount which is generally expressed as a fixed percentage which an insured must pay against a claim after the deductible is satisfied.

2) Re-insurance-

Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the practice where insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim.

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