ACCA Strategic Business Leader (SBL) Practice Exam

In risk management, what does 'transference' mean?

1. Shifting risk to another party

2. Avoiding risk entirely

3. Reducing the likelihood of risk

4. Accepting the risk as it is

The correct answer is: Shifting risk to another party

Transference in risk management refers to the practice of shifting the responsibility or burden of a risk from one party to another. This can involve various strategies, such as purchasing insurance or outsourcing certain operations, where the party that assumes the risk is better equipped to manage it or the financial implications are more viable for them. By transferring the risk, the original party reduces its exposure to potential financial loss or liability associated with that risk. Unlike avoidance, which seeks to eliminate the risk altogether, or reduction efforts aimed at minimizing the likelihood or impact of a risk, transference strategically reallocates the risk burden. Acceptance, on the other hand, involves acknowledging the existence of a risk and deciding to carry the potential consequences without any mitigating actions. Thus, transference is a proactive approach in risk management that allows organizations to continue operations while mitigating potential financial impacts.