What is meant by 'risk transfer' in the context of ORM?

In the context of Operational Risk Management (ORM), 'risk transfer' refers to the practice of shifting the management of risk to third parties. This involves transferring the financial responsibility for certain risks to another entity, usually through contractual agreements. Organizations can achieve this through various means, such as purchasing insurance policies or outsourcing functions to specialized firms that can better manage particular risks.

By doing so, the organization can protect itself from potential losses and allow itself to focus on its core activities without bearing the full financial burden of certain risks. Transferring risks does not eliminate them but rather involves allocating the responsibilities associated with those risks to parties that may be better equipped to handle them.

The other options present different approaches to risk management but do not specifically describe risk transfer. Increasing internal control mechanisms focuses on enhancing internal processes to mitigate risk rather than transferring it. Budgeting for risk-related expenses is about planning financial resources for potential losses without passing the burden to a third party. Selling insurance policies, while a form of risk transfer, is a specific method rather than a comprehensive definition of risk transfer itself. Hence, the most accurate understanding lies in the broader view of managing risk through third-party involvement.