Risk Management Strategies
Risk management strategies are systematic approaches to treating risks. Through risk assessment, a financial institution can identify the inherent risk it faces when doing a specific task. Risk management strategies are ways of dealing with these risks. The four main risk management strategies are to avoid, reduce, transfer, or accept the risk.
Avoiding a risk takes that specific threat off the table. If the company can successfully avoid the risk, the danger of loss is eliminated. However, not all risks can be completely avoided. Even when they can, it may not be practical or cost-effective to do so. If the manager decides to avoid the risk, they might decide not to take on a new project, do the project a different way that doesn’t involve the same level of risk, or make changes to equipment and processes.
Reducing the risk can improve the outlook for the firm. Effective ways to minimize the possibility of loss include improving quality control, using compliance software, training staff, keeping equipment well-maintained, implementing better processes, or managing vendors more carefully. Since the risk has not been completely avoided, the organization also needs a plan for recovering when these systems fail. For instance, having a reliable backup for all data can help with disaster recovery.
Transferring risk is shifting the risk to someone else, either to another employee or to another company. If only one employee knows how to do a task, the risk is that they will leave or be unable to do the job when it is needed. This risk can be transferred by training several people to do the same task. Buying insurance is a common way to transfer risk.
Accepting risk usually means that the decision-makers have decided that the risk is too minimal be an important concern. Either it is extremely unlikely to happen, or the loss would be minor compared to the potential for gains. If accepting risk is the choice, then it is important to have a recovery plan in place.
Learn more about the risk management process.