The amount of risk a company or an individual is willing to accept varies based on the risk management strategy accepted by that company or individual. Risk management strategies range from avoiding all risk whenever possible, to accepting most risks and doing everything possible to eliminate those risks. When accepting risk, the company or individual must make sure it is a potentially profitable decision. Once the level of risk that is acceptable is determined, a strategy matching that level can be chosen.
Risk avoidance means avoiding projects or investments that offer a higher level of risk than the company or individual is willing to accept. Each individual or company should determine the level of risk that is acceptable in an investment or company activity. If the level of risk of the potential activity is higher than the acceptable amount, that opportunity is declined under the risk avoidance strategy.
Risk transfer is used to eliminate the risk in exchange for consideration given to the company that accepts the risk. According to C-risk.com, this consideration is commonly in the form of money paid to the company that accepts the risk. The company accepting the monetary payment then insures the company making the payment by accepting the risk and covering any expenses associated with that risk if they occur.
Risk allocation involves sharing the risk with another party. In business, this can be done by having another organization work in partnership with your company on a project. The companies agree to share the expense associated with the risk. This can also be done with private investments. This is done by having multiple investors contribute into the total investment, each sharing a portion of the risk based on their investment and any written clauses in their investment agreement.
Sometimes the cost to either share a risk or transfer the risk is too high. An example of this would be that the premiums paid to the insurer are higher than the cost of taking the risk itself in the view of the company. In a private investment, an example could be if the other investors are asking for clauses in the investment contract that the original investor feels could cost it more money than the financial risk of the investment.
Risk abatement refers to accepting the risk involved in an action, but doing everything possible to limit the amount of risk involved. An example for a company installing a new employee review system would be to contact other companies using that review system. They would ask that company about legal issues and issues that arose with employee relations based on that new review system, and how that company reduced them. The company would implement those recommendations, as well as having outside resources such as an attorney review the policy for possible problems. The company then implements any recommendations from the attorney to reduce the risk as much as possible.
- Photo Credit business colleagues preparing for business meeting image by Vladimir Melnik from Fotolia.com
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