What is the difference between "assumed risk" and "transferred risk"?

The distinction between "assumed risk" and "transferred risk" is fundamentally centered on who bears the financial responsibility for potential losses. When individuals take on "assumed risk," they accept the possibility of a loss themselves, often without the protection of insurance coverage for those specific risks. This means that in situations where they face potential financial exposure, they operate under the understanding that they may have to cover the costs themselves.

In contrast, "transferred risk" occurs when an individual or entity shifts that financial responsibility to another party, typically through an insurance policy. By purchasing insurance, individuals transfer the potential financial burdens of certain risks to the insurance company. This allows them to manage their financial exposure and gain peace of mind knowing that the insurer will cover losses up to the terms of the policy.

Understanding this distinction is crucial for anyone studying insurance because it highlights the principles of risk management that underpin not just personal insurance choices but also broader insurance practices.