Risk Transfer

Common routes are insurance, where a premium buys protection against defined losses; hedging with derivatives, which pass price movements to a counterparty; contract terms such as indemnities and liability caps; and outsourcing a function to a supplier under a service contract. Transfer is one option of risk treatment, alongside avoiding, reducing and accepting. It rarely removes the risk entirely. Insurers exclude events, set deductibles and limits, and may fail to pay. A supplier's failure can still hurt your customers and reputation, and financial regulators generally do not let outsourcing move accountability. New risks also appear, such as credit risk on the insurer. Reinsurance is how insurers themselves transfer risk. When only part is moved, it is often called risk sharing. Transfer changes who pays first, not who answers to customers, regulators or the press.

A bakery chain buys property insurance for its central kitchen, with a deductible of 1% of the insured value, and hedges a share of its foreign-currency ingredient purchases with forward contracts. If a fire occurs, the insurer pays most of the repair bill, but the chain still bears the deductible, the sales lost during the shutdown and any gap if the policy excludes the cause.