What does "risk transfer" entail in risk management?

Risk transfer in risk management involves shifting the responsibility for certain risks from one party to another, often through the use of insurance contracts. This approach allows an organization to protect itself from potential financial losses associated with specific risks by offloading the potential financial burden to an insurer or another third party.

For example, when a company purchases an insurance policy, it pays premiums in exchange for coverage against particular risks, such as property damage or liability claims. If a covered event occurs, the insurer assumes the financial risk and compensates the company for the losses, thus effectively transferring the risk.

This strategy provides organizations with a mechanism to manage risk exposure without entirely avoiding it or increasing their internal risks. While it does not eliminate risk, it enables entities to handle potential financial impacts in a more structured and manageable way.