Risk Transfer

From Open Risk Manual


Risk Transfer denotes any activity that has the effect of transferring risk from one legal entity, person or group of persons to another. The process of formally or informally shifting the financial consequences of particular risks from one party to another, whereby a household, community, enterprise or State authority will obtain resources from the other party after a Risk Event of Disaster occurs, in exchange for ongoing or compensatory social or financial benefits provided to that other party.

It is a common technique used by Risk Managers to address or mitigate potential exposures of the organization. A series of techniques describing the various means of addressing risk through insurance and similar products. Refers to the shifting of the burden of loss to another party through legislation, contract, insurance or other means. It can also refer to the shifting of a physical risk or part thereof elsewhere.

Insurance is a well-known form of risk transfer, where coverage of a risk is obtained from an insurer in exchange for ongoing premiums paid to the insurer. Risk transfer can occur informally within family and community networks where there are reciprocal expectations of mutual aid by means of gifts or credit, as well as formally, wherein governments, insurers, multilateral banks and other large risk-bearing entities establish mechanisms to help cope with losses in major events. Such mechanisms include insurance and reinsurance contracts, catastrophe bonds, contingent credit facilities and reserve funds, where the costs are covered by premiums, investor contributions, interest rates and past savings, respectively.

Types of Risk Transfer

In principle any identified Risk Type can be: