What is risk management?
Risk management can be defined as the identification of risks, followed by the observation and management of these risks in order to minimize the negative effect they have on the organization. The prevention of these risks allows businesses to grow their success through the prevention of threats and exploitation of opportunities.
Importance of risk management
Risk management allows an organization to expect the unexpected, this decreases the intensity of the risk as well as the possibility of the risk taking place. If risk management is absent from an organization, short term and long term goals cannot be efficiently defined. Goals can’t be defined without the consideration of risks, if that is the case, the smallest risk could majorly disrupt the organization’s operations.
The 4 main risk management strategies are:
- Risk acceptance
This method is best utilized when the risk has a low chance of reoccurring, and even if it does happen again the organization must be well suited to deal with it. Managing risks using this approach is somewhat of a gamble, but frequently we find that accepting the risk is cheaper than dealing with the risk itself.
Approaching a risk by means of acceptance does not mean a risk wont’ take place, it is quite the opposite. The risk will still take place and in full effect for that matter, but sometimes allowing the risk to happen is a good thing. It sometimes makes more sense to monitor the risk than spend a large sum of money limiting its effects.
- Risk Transference
This method takes place when the responsibility of an occurring risk is transferred to another entity. A contract is drawn up between the organization and the entity stating that for a certain financial fee, the responsibility of handling, minimizing, and eliminating the risk is transferred from one entity to the other. The organization has no responsibility over the risk whatsoever. The most popular example explaining this approach is travel or health insurance. They accept the risks and handle the financial repercussions that may or may not take place.
Keep in mind, this doesn’t mean that the risk no longer exists, this simply means that the responsibility of the risk is transferred to the other entity.
- Risk avoidance
This simply states that the organization evades any and all actions that could lead to an occurring risk. Approaching risk management through this method means that the organization completely avoids risks, but this is not always regarded as a positive thing. Avoiding all risks also translates to losing many positive opportunities.
The majority of opportunities come with a risk, whether big or small it’s still a risk. Attempting to avoid risks all the time will lead to avoiding opportunities as well, which is why utilizing this strategy should be reserved for risks that would have significant impact on the organization. In this case, risk analysis is of the highest importance as it will allow the organization to make the most informed decision.
- Risk reduction
In simple terms, risk reduction is the minimization of the impact a risk has on an organization. Selecting this method of risk management means research would have to be done in order to find certain approaches which make a risk more manageable and minimizes its effects on a business.
To conclude, deciding on using one of these methods simply depends on the risk being faced. In order to choose the right risk management strategy the risk would have to be analyzed so it can be solved using the most effective method.