The Four Strategies of Risk Management

Risk Management refers to an organization’s ability to identify, minimize and respond to disruptions. After identifying the risks to your organization and their impact, you can begin devising a strategy that will address the threat. Choosing the right risk management strategy for your company can play a critical role in properly managing risks to your business. 

There are four main risk management strategies:

• Risk acceptance
• Risk transference
• Risk avoidance
• Risk reduction

Risk acceptance

Risk acceptance refers to when a risk is tolerated with no action taken to mitigate it. This approach is often used when dealing with threats that have a low chance of occurring and also have a minimal impact if and when they occur. A firm will simply accept and absorb the risk without trying to prevent it. This strategy is often used when the attempt to minimize the risk would cost more than the risk itself. Say taking action to prevent a particular $20,000 risk would take $50,000 to eliminate it. It wouldn’t be worth it. For these reasons, firms will simply accept the threat and focus instead on how to remedy or absorb it if it occurs.

Risk transference

Risk transference shifts the risk via a contract to an external party who will assume the risk on the organization’s behalf. However, this doesn’t eliminate the risk, it just simply transfers the responsibility of it to the third party. This often saves your company a headache, as the work and its risk are outsourced externally from your business.

Risk avoidance

In this approach, a risk is eliminated by not taking any action that would allow the risk to occur. This aims to completely eradicate the risk by not taking it. This strategy is usually applied to risks that are considered too risky, and could have a major negative impact on your business. However, it’s important to carefully employ this approach, as the saying goes, “no risk, no reward.” Continually avoiding risks may cause your organization to miss out on the possible upside. It’s important to carefully analauze risks against their rewards and negative impacts. 

Risk reduction

Risk reduction is a common strategy in which an organization tries to minimize the effect of a risk by taking action to lessen the impact. Many, if not most risks, are unavoidable, and when they must be taken, it’s best to try to make the impact severity as minimal as possible. This is where strategy comes to play. Take a close look at your operations and ask yourself what processes can you put in place to lessen the threats to your business?

Which strategy you take depends on the risk itself and your organization’s ability to identify, evaluate and consider those risks. It’s important to carefully look at each potential issue in depth with a keen eye to determine the best course of action. These four strategies are common approaches to lessen, accept, or avoid risk. Each one has it’s own pros and cons, and should be meticulously considered when looking to apply them.