What is Risk transference?

Understanding Risk transference

Paying an external party to accept the financial impact of a given risk. Risk transference is a risk treatment strategy where an organization shifts some or all of the potential financial consequences of a risk to another party typically through insurance contracts or partnerships. The underlying risk still exists but another entity bears some or all of the financial impact. Risk transference is defined in standards like ISO 31000 ISO 27001 and NIST RMF. Organizations implement risk transference through cyber insurance policies service provider contracts with liability clauses outsourcing agreements and partnership arrangements with well-defined responsibilities. For example a retailer might purchase a comprehensive cyber insurance policy that covers financial losses from data breaches including notification costs legal fees regulatory fines and business interruption transferring a significant portion of the financial impact of security incidents to the insurance provider while continuing to implement security controls to reduce risk likelihood. Related terms Cyber insurance Risk sharing Contractual risk transfer Outsourcing Service level agreement Indemnification Liability Third-party risk management.