What does "risk transfer" involve in ORM?

In Operational Risk Management (ORM), "risk transfer" involves shifting the financial burden of a risk to another party. This method allows an organization to manage potential losses by transferring the responsibility for certain risks to third parties, which may include insurers or outsourced service providers.

For example, when a company purchases insurance, it essentially pays a premium to transfer the financial impact of specific risks to the insurance company. In doing so, the organization mitigates its own exposure to those risks, as the insurance company will take on the responsibility for any losses that occur as a result of the covered events.

This approach is a strategic decision made to ensure that while risks exist, their potential impact on the organization’s financial health is reduced through external means. This makes risk transfer an important component of a comprehensive risk management strategy, allowing businesses to focus on core activities without bearing the full brunt of potential operational setbacks.