Page 51 - EBOOK RISK MANAGEMENT

b) Risk Transfer

Risk transfer refers to the transferring the risk to another party to minimise the impact
of losses. The risk may transfer through insurance or non-insurance techniques.

i) Insurance

Insurance is the contractual transfer of risk from one party (insured) to the another

party (insurance company) for the exchange of premiums. Transferring the risk to
the insurance company means that the insurance company is liable to pay for

the losses that are caused by risk as per insurance contract.

ii) Non-Insurance

There are two types of risk transfer for non-insurance measures which is hedging
and hold-harmless agreement. Hedging is an agreement to buy or sell a

commodity at a certain price to avoid losses due to the increasing or decreasing
price due to fluctuations by entering into future contracts. Hedging is a risk

management techniques for speculative risk. Hold-harmless agreement are risk

transfer measures whereby one party assumes responsibility for another person’s
loss. As an example, an agreement between retailer and manufacturer will

relieving the retailer from any liability from manufacturer defective product.

5.2 Selection & Implementation of Risk Management Techniques

The selection of a risk management programme may be based on two factors:

 Financial criteria: whether it can affect the firm profitability or rate of return

 Non-financial criteria: whether it can affect the growth of firm, humanitarian
aspect and legal requirement.

The risk matrix can also be used as a guidance in selecting risk management
methods. However, in many case, combination of several techniques is needed to

establish the appropriate risk management technique. Table below shows a matrix

that can be used as guidance in selecting the risk management methods. Thus, the
selected method is depends on the experience of the risk manager.

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