In risk management, what technique involves paying someone to take on risk?

In risk management, the technique that involves paying someone to take on risk is known as risk transference. This approach is used when an individual or organization wants to shift the potential financial burden or liability from themselves to another party. By transferring the risk, one can mitigate the impact of unforeseen events on their organization.

Typically, this transference occurs through insurance policies, where an insurer agrees to cover potential losses in exchange for premium payments. This way, the insured party pays a relatively small amount compared to the potential cost of a large loss, thereby protecting themselves from significant financial exposure. It underscores the strategic decision to manage risk by employing external parties (like insurers) to bear that risk instead.

Other techniques in risk management, such as risk avoidance, risk retention, and risk reduction, focus on different strategies. Avoidance seeks to eliminate the risk entirely, retention means assuming the risk (often because the cost of insuring it is greater than the risk itself), and reduction aims to lessen the likelihood or impact of the risk rather than transferring it. Each technique serves its purpose, but in the context of paying someone to take on risk, risk transference is the correct choice.