In which situation would transferring risk be considered a viable option?

In which situation would transferring risk be considered a viable option?

• A. When an organization has a high tolerance for risk.
• B. When the cost of risk exceeds potential losses.
• C. When risk is low but impact is high.
• D. When internal controls are sufficient.

Answer: (B)

Transferring risk is a strategy that involves shifting the responsibility for managing a risk to a third party, typically through insurance, outsourcing, or contractual agreements. This approach is particularly viable when the cost of managing the risk outweighs the potential losses the organization would face if the risk materializes. In a scenario where the cost of risk—such as insurance premiums or other risk management expenses—exceeds the potential financial impact of the risk, transferring that risk becomes a sensible option. This means the organization can effectively reduce its exposure to financial loss without incurring excessive costs in mitigation efforts. For example, if the potential loss from a risk is $50,000, but the cost to implement controls or mitigate the risk is $100,000, then transferring the risk (perhaps through insurance) can be a much more financially prudent decision. Given this context, transferring risk in situations where the anticipated costs are greater than the potential losses helps organizations optimize their resources and manage their overall risk profile effectively.

Transferring risk is a strategy that involves shifting the responsibility for managing a risk to a third party, typically through insurance, outsourcing, or contractual agreements. This approach is particularly viable when the cost of managing the risk outweighs the potential losses the organization would face if the risk materializes.

In a scenario where the cost of risk—such as insurance premiums or other risk management expenses—exceeds the potential financial impact of the risk, transferring that risk becomes a sensible option. This means the organization can effectively reduce its exposure to financial loss without incurring excessive costs in mitigation efforts. For example, if the potential loss from a risk is $50,000, but the cost to implement controls or mitigate the risk is $100,000, then transferring the risk (perhaps through insurance) can be a much more financially prudent decision.

Given this context, transferring risk in situations where the anticipated costs are greater than the potential losses helps organizations optimize their resources and manage their overall risk profile effectively.