Which strategy involves paying someone else to take on the risk?

The concept of risk transference involves shifting the responsibility of managing and bearing the financial consequences of a risk to another party. This is often accomplished by entering into agreements such as insurance policies, whereby the insurer assumes the risk in exchange for premium payments. This strategy allows individuals or organizations to mitigate their financial exposure to potential losses and can be particularly beneficial for managing insurable risks.

By transferring the risk, the original party reduces their vulnerability and can focus on other aspects of their operations without the constant concern of certain adverse events. For example, a business may choose to purchase liability insurance to protect itself against lawsuits. In this case, the insurance company becomes responsible for covering the costs associated with specific risks, effectively relieving the business of that burden.

In contrast, other strategies, such as risk avoidance, retention, and reduction, do not involve transferring risk to another party, which is a key differentiator in identifying risk transference.