Fundamentals of Risk Management

tolerate, treat, transfer and terminate
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transfer risk
When the likelihood of a risk materializing is low but the potential is high, the
organization will wish to transfer that risk. Insurance is a well-established mechanism 
for transferring the financial impact of losses arising from hazard risks and (to a 
lesser extent) control risks. The issues associated with the use of insurance as a risk 
transfer mechanism are considered in more detail in Chapter 17.
In some cases, risk transfer is closely related to the desire to eliminate or terminate 
the risk. However, many risks cannot be transferred to the insurance market,
either because of prohibitively high insurance premiums or because the risks under 
consideration have (traditionally) not been insurable.
Risk transfer can be achieved by conventional insurance and also by contractual 
agreement. It may also be possible to find a joint-venture partner, or some other 
means of sharing the risk. Risk hedging or neutralization may therefore be considered 
to be a risk transfer option, as well as a risk treatment option.
The cost of risk transfer is a component of risk financing. Once again, there is 
variation in the definitions used. In relation to risk financing, both BS 31100 and
ISO 31000 agree that risk financing involves the cost of contingent arrangements
for the provision of funds to meet the financial impact of a risk materializing. Such 
arrangements are usually provided by insurance, and insurance is, therefore, finance 
that is contingent upon certain insured events taking place.
A difference in the definitions in BS 31100:2008 and ISO 31000:2009 is that
ISO 31000 also considers that the cost of risk financing should include the provision
of funds to meet the cost of risk treatment. In this text, resourcing of controls is
considered to be a separate step in the risk management process. This is another 
example that illustrates that there is no universally agreed or common language
of risk.
There is another issue of terminology with the use of the phrase ‘risk transfer’. 
ISO 31000 recommends that risk sharing should be used in preference to risk transfer. 
The argument is that a risk can never be fully transferred and whatever the intention 
of the parties, the risk will always be, to some extent, shared. This is an accurate 
analysis, but the choice of terminology used within an organization will also be
influenced by other factors. In relation to risk sharing, the insurance industry uses 
the terminology risk transfer. It may be difficult for the enterprise risk manager to 
insist on the use of the phrase risk sharing when the insurance manager in the or-
ganization prefers to use the terminology of risk transfer because that is the standard 
terminology used in part of the external context that is the insurance market.
terminate risk
When a risk is both of high likelihood and high potential impact, the organization 
will wish to terminate or eliminate the risk. It may be that the risks of trading in a 
certain part of the world or the environmental risks associated with continuing to 
use certain chemicals are unacceptable to the organization and/or its stakeholders.

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