How do risk financing and risk transfer differ?

Risk financing and risk transfer are two distinct strategies used to manage risks within an organization. The correct choice highlights that risk financing involves maintaining sufficient financial resources to cover potential losses that may arise from risks. This strategy ensures that an organization has the necessary funds available to absorb the financial impact of risks, effectively allowing for a predefined level of self-insurance.

On the other hand, risk transfer involves shifting the responsibility for managing risk to another party, often through mechanisms such as insurance policies or contracts. By transferring certain risks, an organization can mitigate its exposure to potential losses while relying on another entity to handle the financial repercussions associated with those risks.

Thus, the statement that "risk financing maintains financial resources, while risk transfer shifts responsibility" accurately captures the fundamental distinction between the two concepts. Risk financing focuses on the organization’s approach to securing adequate financial reserves, while risk transfer emphasizes changing the burden of risk onto another party, showcasing the different ways organizations can manage their risk profile.