Question

1. Some events rarely happen but when they do insurance company must respond appropriately. They fall in a high severity and low frequency category but there are effective means of risk transfer and financing.

Explain the risk transfer options, how insurers respond and the effect on the company operations.                                                                                           [25 marks]

Answer 1

Risk transfer meaning: Risk transfer is a risk management and control strategy that involves the contractual shifting of actual risk from one party to another i.e, shifting of a specific risk from one party to another willing party.

Risk transfer options:

1. Insurance: Risk transfer is most often accomplished through an insurance policy. This is a voluntary arrangement between two parties, the insurance company and the policyholder, where the insurance company assumes strictly defined financial risks from the policyholder. Insurance companies charge a fee, or an insurance premium, for accepting this risk i.e, the Insurance premium.

some important steps to keep in mind while choosing insurance as the risk transfer option:

Certificate of Insurance Requirements: A certificate of insurance is a form issued by an insurer or agent that lists the coverage(s), expiration date(s) and limits of the insured’s coverage. when you are agreeing to pay the certian amount as insurance premium to the insurance company for accepting the risk, you must receive an insurance certificate and make sure that the insurance certificate should be specific about the amount of risk coverage, conditions in which risk coverage applicable, etc.

Minimum Insurance Requirements: Consult your insurance agent and legal counsel to determine the minimum coverage for subcontractors. If they don’t have the minimum, they could be putting you at more risk than it’s worth.

Review System: Establish a yearly review system to ensure you are consistently engaging in proper risk transfer, and make sure you have a filing system that is up-to-date in order to keep track of documents.

Record keeping: Retain purchase orders, leases, other contracts and certificates of insurance in accordance with all applicable laws and regulations in the jurisdictions and industries in which you operate

2. Contracts: Risk transfer can also be accomplished through non-insurance agreements such as contracts. These contracts often include indemnification provisions. Indemnification agreements are completely independent of insurance coverages and transfer the financial consequences of legal liability from one party, the indemnitee, to another, the Indemnitor.

some important steps to keep in mind while choosing contracts as the risk transfer option:

Carefully review contracts before signing and review all of your business contracts and look closely.

Secure signed written contracts with subcontractors, tenants and service providers. Securing signed written contracts from your subcontractors, tenants and service providers before they begin work or their lease starts can prove very beneficial to enforcing the terms of your agreements.

Record keeping: Retain purchase orders, leases, other contracts and certificates of insurance in accordance with all applicable laws and regulations in the jurisdictions and industries in which you operate

3. Waiver of subrogation: If you seek a waiver of subrogation from your workers’ insurers, make sure each generally encompasses all hazards, locations, and work details. A waiver of subrogation should be void of limitations so that each risk is covered.

The effect on company operations:

When the company opts for risk transfer options, then in case of uncertain events that happened which will push the company into financial difficulties, it can be mitigated easily.

When the risk is transferred to the other party then the company will be in a safe path to continue its operations uninterruptedly.

In a case the company does not transfer the risk through any of the risk transfer options then in case of an uncertain event the company's operations will be severally disrupted and some times company will have to close down its affairs.