There are common challenges with insurance claims and risk in general in every business, from the small corner store to the large manufacturer. Fire can damage buildings, someone could slip and fall, vehicle accidents happen frequently, and losses can occur as a result of defective products. A good understanding of risk in its various forms can help investors better figure out the opportunities, trade-offs, and costs associated with different investment approaches. In the financial world, risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action given the fund’s investment targets and risk tolerance.
Risk Management Strategy
Managing risk is one of the essentials in controlling the risk in the lifecycle of risk management. Risks are of several types and it gives a bad impact on the overall growth of the business. Then, there are some strategies that are important to apply to the business to control it effectively. And the businessman calls these strategies as risk treatment. Opting for the appropriate strategy to control the risk is also one of the essential factors in managing the risk.
Risk management strategies are of 4 types: -
- Risk Acceptance
- Risk Avoidance
- Risk Reduction
- Risk Transfer
These risk treatment strategies are explained below: -
- Risk Acceptance: - The risk acceptance approach or strategy says that a businessman has identified the level of risk. Like, there is a risk in a project and the businessman knows that the impact of this risk is extremely low or we can say it is a small risk. In this case, the businessman will accept the risk. Hence, this is considered one of the best strategies when the risk is small or unlikely to happen. So, that is called the approach of risk acceptance where the risk exists and the businessman will do nothing to mitigate or change it. For instance, in a company, there is an implementation of an E-commerce solution and the manager knows that there is a risk but the risk likelihood or risk impact is low; hence, the company would accept the risk.
- Risk Avoidance: - If a risk associated with starting a project, introducing a product, or moving a firm is too great to bear, it may be preferable to avoid it. In this scenario, risk avoidance entails refraining from engaging in risky actions. While some people are risk lovers and others are risk-averse, managing risk in this way is most likely how people deal with personal risk. Everyone has a tipping point where something becomes too dangerous to undertake, therefore that means Risk avoidance. It means that if there is a risk in a specific activity and you choose to participate in that activity, there is a probability that you will have to confront the risk or suffer the repercussions. For example, if a person is studying for an accounting exam and is aware that there is a chance he will pass or fail the exam. As a result, in this scenario, the person will avoid taking that exam.
- Risk Reduction: - Businesses can assign a risk level that is acceptable in risk avoidance, which is known as the residual risk level. As there is typically a way to at least lessen the risk, risk minimization is the most popular strategy. It entails adopting countermeasures to lessen the severity of the repercussions. One method of reducing risk is transferring risk like buying insurance. For instance, you are working on a project and if that project is delayed for one day, it is acceptable but if a project is delayed for more than one day, it is not acceptable. And risk reduction defines the level of risk acceptance.
- Risk Transfer: - Risk transfer refers to the transfer of a risk to a third party or organization. Risk transfer can be outsourced, transferred to an insurance agency, or transferred to a new business, as when leasing property is done. Risk transfer does not always imply a reduction in expenses. When a risk transfer can be employed to reduce future damage, it is the best alternative. So, while insurance can be costly, it may be more cost-efficient than facing risks and being completely responsible for the consequences. For example, in a company, you are implementing an E-commerce solution and you know that you are lacking in the expertise, so you would outsource the work to some other company. Similarly, you purchased a car and find it’s risky to park it outside the house. So, in that case, you would take the insurance to transfer the risk.
Thus, these are the four risk strategies that are essential to managing the risk in any organization.
Determinants of risk mitigation
The main determinants of risk mitigation are as under:-
- Understand the company and its needs.
- Take the guidance of experts and professionals.
- Identify the risk that occurs.
- Encourage risk-taking ability.
- Encourage the consideration of mitigation options.
- Not all risks require a mitigation plan.
In the list above, every organization faces risks because where there is a risk, there is a profit. The risk could be handled by adopting these strategies. But before implanting the risk management strategies, the important part is the assessment of risk, which can be done in 3 ways- the management should record the risk; it should be systematic and necessary to review it on regular basis. Hence, it’s all risk management and its strategies.