What type of risk management involves delegating risk to another entity?

The concept of risk transfer refers to the strategic approach of shifting the potential impact or responsibility of a risk to another party, typically through contracts or insurance. By engaging in risk transfer, an organization effectively delegates the ownership of the risk to an external entity, which takes on the financial implications or liabilities associated with that risk.

In practical terms, this is often seen in business arrangements such as outsourcing certain operations or purchasing insurance policies. In these instances, the primary organization alleviates its direct exposure to specific risks, thereby managing its overall risk profile.

Risk avoidance focuses on eliminating activities that expose the organization to risk, while risk acceptance entails acknowledging the risk but deciding to proceed without any changes. Risk mitigation involves taking steps to reduce the severity or likelihood of a risk occurring but does not involve shifting that risk to another entity. Each of these approaches serves a different role in comprehensive risk management strategy, yet they do not include the delegation aspect inherent in risk transfer.