What is the purpose of transferring risk?

The purpose of transferring risk is to pass the risk on to another party. In the context of contracts and procurement, risk transfer is a strategy employed to share or shift the potential burden of risk from one entity to another, typically through the use of contracts or insurance. By transferring risk, the entity retains less financial liability concerning potential adverse events, allowing them to focus their resources on their core operations without the threat of significant losses from certain risks.

For example, in construction contracts, a contractor may transfer the risk of material price increases to a supplier by agreeing on fixed prices. This means that if prices rise, the supplier bears the cost instead of the contractor, thus safeguarding the contractor's financial position.

Transferring risk does not necessarily enhance internal capacity to manage risks or avoid negative outcomes entirely, as those components relate more to risk management and mitigation strategies. Continuous monitoring of risks is a crucial part of effective risk management, but it does not address the concept of risk transfer itself.