Explain about the mechanisms of financial system for risk to be transferred.
Financial systems also give mechanisms for risk to be transferred. For instance insurance contracts permit a party as like a firm or household to transfer the risk of loss of wealth because of theft or fire to other party such like an insurance company. The household or firm will pay a fee (insurance premium) for such transfer. The insurance company, by giving a huge number of insurance contracts, is better capable to manage the risk than an individual household or firm as they can acquire benefits of pooling and diversification. Therefore, a more efficient allocation of risk results.