What do we call the act of transferring the cost of risk to another party?

The act of transferring the cost of risk to another party is known as risk transfer. This concept involves shifting the financial burden of a potential loss from one entity to another. In practice, this often occurs through mechanisms such as insurance policies, where an insured party pays premiums to an insurer in exchange for coverage against certain risks.

Risk transfer serves to protect individuals and businesses from the financial impacts of uncertain events, such as property damage, liability claims, or business interruptions. By transferring these risks, stakeholders can manage their exposure more effectively and plan their financial strategies with greater confidence.

Other terms, such as financial segregation, traditional insurance contracts, and liability exemption, do not accurately capture the essence of transferring risk in a manner that protects against financial losses. Financial segregation generally refers to dividing assets to mitigate risk within a portfolio, while traditional insurance contracts are one method through which risk transfer is achieved. Liability exemption typically indicates a situation where one party is not held responsible for damages, but this does not inherently entail the transfer of risk costs.