What are examples of risk transfer?

Buying insurance is the most common: the insured pays a premium and the insurer pays covered losses. Contract clauses are the other route, such as a construction contract in which the contractor agrees to cover the owner's liability for injuries or damage during the contractor's work.

What is the difference between risk transfer and risk retention?

Retention pays losses from one's own funds, through expensing, a loss reserve, borrowing or an affiliated captive. Transfer moves the financial responsibility for losses to an insurer or another party.

Is a captive insurer a form of risk transfer?

NAIC calls a captive, an insurer wholly owned by the insured, essentially a form of self-insurance. The IAA Risk Book lists an affiliated captive as a way to retain risk rather than transfer it.

Risk transfer

Risk · Cloudbreak team · Updated October 29, 2026 · 5 sources

Definition

Risk transfer is a risk management technique that moves the cost of a possible loss to another party, either an insurance company or another business through a contract, such as a hold harmless clause.

How it works

Risk transfer is one of the two main ways to pay for losses that do happen. The other is risk retention, which pays losses from one's own funds, through deductibles, reserves or self-insurance.

Transfer moves the financial responsibility for a loss, not the legal responsibility. If the party that took on the risk cannot or will not pay, the original party still has to arrange payment some other way.

Insurance transfer: the insured pays a premium, and the insurer pays covered losses from the perils the policy names.
Contractual transfer: indemnity and hold harmless clauses, waivers of recovery rights and insurance requirements in leases and contracts shift risks one would otherwise bear onto others. A lease, for example, may make a tenant pay for fire damage the tenant's negligence causes.

Transfer is rarely total. Deductibles and self-insured retentions keep part of each loss with the insured, and FEMA's 2015 Public Assistance insurance policy notes that generally no insurer will accept 100 percent risk transfer.¹

Example

Example inputs: an apartment building with a total insurable value of $20,000,000 carries a 2% wind and hail deductible, and a hailstorm causes a $1,500,000 covered loss. A percentage deductible is a share of the property's insured value, which the insurer subtracts from the loss before paying up to the policy limit. Here the owner keeps $400,000 and the insurer pays $1,100,000, so 73% of the loss is transferred.^2,1

Example: who pays a $1,500,000 hail loss with a 2% deductible on $20,000,000^2,1

Paid by the insurer (transferred)$1,100,000
Kept by the owner (2% deductible)$400,000
Total$1,500,000

The deductible sets the split. At 5% of total insurable value, the most Fannie Mae's Multifamily Guide allows for wind and hail, the same loss leaves the owner with $1,000,000 and transfers only one third.^3,1

Example: $1,500,000 hail loss on a $20,000,000 building^2,1,3
Wind and hail deductible	Owner keeps	Insurer pays	Share transferred
1%	$200,000	$1,300,000	87%
2%	$400,000	$1,100,000	73%
5%	$1,000,000	$500,000	33%

Where you'll see it

Insurance policies: deductibles, self-insured retentions and limits mark where the transfer to the insurer starts and stops.
Leases and construction contracts: hold harmless clauses come in limited, intermediate and broad forms, depending on how much liability they shift. Broad form clauses are unenforceable in a number of states.
Lender requirements: Fannie Mae caps the deductibles on multifamily properties securing its loans, such as a wind and hail deductible of no more than 5% of total insurable value.³

Questions

What are examples of risk transfer?: Buying insurance is the most common: the insured pays a premium and the insurer pays covered losses. Contract clauses are the other route, such as a construction contract in which the contractor agrees to cover the owner's liability for injuries or damage during the contractor's work.
What is the difference between risk transfer and risk retention?: Retention pays losses from one's own funds, through expensing, a loss reserve, borrowing or an affiliated captive. Transfer moves the financial responsibility for losses to an insurer or another party.
Does insurance transfer all of the risk?: No. Deductibles and self-insured retentions keep part of each loss with the insured, and FEMA's 2015 Public Assistance insurance policy notes that generally no insurer will accept 100 percent risk transfer.¹
Is a captive insurer a form of risk transfer?: NAIC calls a captive, an insurer wholly owned by the insured, essentially a form of self-insurance. The IAA Risk Book lists an affiliated captive as a way to retain risk rather than transfer it.^4,5

Related terms

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Sources

Written by the Cloudbreak team. Numbers, dates and rules cite the published sources below.

1. Federal Emergency Management Agency (FEMA): FP 206-086-1 Public Assistance Policy on Insurance (June 29, 2015)
2. Insurance Information Institute (Triple-I): Background on: Hurricane and windstorm deductibles
3. Fannie Mae: Multifamily Selling and Servicing Guide, Section 501.02 Property Insurance (effective October 26, 2026)
4. National Association of Insurance Commissioners (NAIC): Insurance Topics: Captive Insurance Companies
5. International Actuarial Association (IAA): IAA Risk Book: Non-Life Perils and Coverages (May 2023)

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