Having an appropriate risk management strategy is critical to dealing with the many types of risk that your organisation could face. But what is a risk management strategy? And what risk management strategies can you use?
Risk management strategy definition
A risk management strategy is a key part of the risk management lifecycle. After identifying risks and assessing the likelihood of them happening, as well as the impact they could have, you will need to decide how to treat them. The approach you decide to take is your risk management strategy. This is also sometimes referred to as risk treatment.
There are four main risk management strategies, or risk treatment options:
- Risk acceptance
- Risk transference
- Risk avoidance
- Risk reduction
Choosing the right one will mean the difference between managing each potential risk effectively or facing serious consequences that could damage your business. Let’s take a closer look at what these four approaches involve and some examples of when you could use them.
Types of risk management strategy
Risk acceptance definition: A risk is accepted with no action taken to mitigate it.
This approach will not reduce the impact of a risk or even prevent it from happening, but that’s not necessarily a bad thing. Sometimes the cost of mitigating risks can exceed the cost of the risk itself, in which case it makes more sense to simply accept the risk. After all, why spend £200,000 to prevent a £20,000 risk?
However, this approach does come with a gamble. You will need to be sure that, if the risk does occur in the future, then you will be able to deal with it when the time comes. Because of this, it is best to accept risks only when the risk has a low chance of occurring or will have minimal impact if it does occur.
Risk transference definition: A risk is transferred via a contract to an external party who will assume the risk on an organisation’s behalf.
Choosing to transfer a risk does not entirely eradicate it. The risk still exists, only the responsibility for it shifts from your organisation to another.
An example of this would be travel insurance. You don’t accept the risk of a lost suitcase or an accident abroad and the costs that this would bring – you pay a travel insurance company to bear the financial consequences for you.
The same goes for the workplace. You may outsource work – and the risks that come with it - to a contractor. In finance, you may adopt a hedging strategy to protect your assets or investments.
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Risk avoidance definition: A risk is eliminated by not taking any action that would mean the risk could occur.
If you choose this approach, you are aiming to completely eliminate the possibility of the risk occurring. One example of risk avoidance would be with investment. If, after analysing the risks associated with that investment, you deem it too risky, then you simply do not make the investment.
Treating risks by avoiding them should be reserved for risks that would have a major impact on your organisation if they were to occur. However, if you avoid every risk you come up against, you may miss out on positive opportunities. You never know, that investment you decided not to make could have paid off. That is why it’s important to thoroughly analyse risks and make the most informed judgement you can.
Risk reduction is a common strategy when it comes to risk treatment. It is sometimes known as lowering risk. By choosing this approach, you will need to work out the measures or actions you can take that will make risks more manageable.
One example of risk reduction would be within manufacturing and the risk of products being produced to incorrect specifications. Using a quality management system can lower the chance of this happening, so this would be a method of risk reduction. In the finance industry, you may face risks associated with new regulations. Implementing a digital solution to help you manage regulatory requirements can mitigate the risks of non-compliance and would therefore also be an example of risk reduction.
So which strategy should you choose?
As you can probably guess, that depends on the risk. You will need to fully understand each risk your organisation faces so that you can choose the appropriate strategy to treat them – whether that’s through acceptance, transference, avoidance or reduction.
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