Which risk management approach involves passing the financial burden of a loss to another party through contract or insurance?

Which risk management approach involves passing the financial burden of a loss to another party through contract or insurance?

• A. Risk Retention
• B. Risk Transfer
• C. Risk Reduction
• D. Risk Avoidance

Answer: (B)

Transferring risk involves shifting the financial burden of a potential loss to another party by contract or insurance. When you buy insurance, the insurer agrees to cover losses within the policy terms, so you don’t have to pay the full amount out of pocket. Similarly, contractual provisions—like indemnification or hold-harmless clauses—set up a transfer of responsibility to another party in the event of a loss. This differs from retention, where you or your organization would pay losses yourself; from reduction, which focuses on lowering the likelihood or impact of a loss but not shifting the cost; and from avoidance, which eliminates exposure altogether by not engaging in the activity.

Transferring risk involves shifting the financial burden of a potential loss to another party by contract or insurance. When you buy insurance, the insurer agrees to cover losses within the policy terms, so you don’t have to pay the full amount out of pocket. Similarly, contractual provisions—like indemnification or hold-harmless clauses—set up a transfer of responsibility to another party in the event of a loss.

This differs from retention, where you or your organization would pay losses yourself; from reduction, which focuses on lowering the likelihood or impact of a loss but not shifting the cost; and from avoidance, which eliminates exposure altogether by not engaging in the activity.