Risk transfer is a strategy of dealing with risks. It describes situation when we transfer the risk to another person or entity such as insurance agency.
Unlike other strategies, there is nothing that happens to the risk itself, only its negative impact is redirected to a third party.
What are the possibilities of risk transfer?
- Insurance - only addresses the financial aspect of the impact of the risk event
- Outsourcing - transfers the responsibility to the supplier, transfers the hazardous work to someone else
- Warranty, hedging (protection against exchange rate risk), futures - transfers the responsibility to the supplier
- Use of financial instruments such as leasing
Each risk is in fact associated with a certain cost that arises in the event of occurrence of the situation described by the risk. The aim, therefore, is to eliminate or at least reduce this future cost. However, using the transfer strategy, we do not completely eliminate the risks, as the transfer does not automatically mean reducing or eliminating the costs. For example, insurance can resolve future costs when a risk event occurs, but it also means regular payment of premiums. This way, we will avoid a one-off payment in the future, however, the cost of the risk transfer is paid on the regular basis in the form of premium. By means of outsourcing, it is not us but our supplier who gets in troubles, but its outage can also cause some financial damage to our company.
When to choose the risk transfer strategy?
We choose the strategy of risk transfer in a situation when there is a possibility to do so and when this turns out to be the most economically advantageous option.