Definition
Risk Transfer
Risk transfer is a risk-management technique that shifts the financial consequences of a risk to another party, typically an insurer.
Buying insurance is the classic example of risk transfer: in return for a premium, the insurer assumes the financial burden of specified losses. Risk can also be transferred contractually, for instance through indemnity clauses, hold-harmless agreements or hedging.
Transfer is one of the four main responses to risk, alongside avoidance, retention and mitigation. It suits low-frequency, high-severity risks that an individual or business cannot comfortably absorb, such as death, major illness or property catastrophe.
Related terms
- Risk RetentionRisk retention is consciously bearing a risk oneself rather than transferring it, by paying for any losses out of one's own resources.
- Risk MitigationRisk mitigation is taking deliberate measures to reduce the probability or the severity of a potential loss, rather than eliminating or transferring the risk entirely.
- Risk AvoidanceRisk avoidance is eliminating exposure to a risk entirely by choosing not to engage in the activity that creates it.
Plain-English explainer from Investdesk Investors Encyclopedia. General information, not financial advice.