Risk Management Strategy: What Is It?

An appropriate risk management strategy is critical to dealing with the many risks your organization could face. 

A risk management strategy is a main part of the risk management lifecycle. After determining risks and assessing the likelihood of them happening, also the impact they could have, you will be required to decide how to treat them. The way you decide to take is your risk management strategy. This is also sometimes called risk treatment.

There are four key risk management strategies or risk treatment options:

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

Selecting the right one will mean the difference between managing each potential risk effectively or facing serious consequences that could damage your business. 

Types of risk management strategy

Risk acceptance

Here, A risk is accepted with no action to reduce it.

This approach will not mitigate the impact of a risk or even prevent it from happening, but that’s not necessarily bad. Sometimes the cost of reducing risks can exceed the cost of the risk itself, making it more sense to simply accept the risk. 

Still, this approach does come with a gamble. You will be required to be sure that if the risk does occur in the future, you will be able to handle it. Due to this, it is best to accept risks only when the risk has a low chance of happening or will have minimal influence if it does occur.

Risk transference

Here, A risk is transferred through a contract to an external party who will assume the risk on an organization’s behalf.

Electing to transfer a risk does not entirely eradicate it. The risk still exists. Only the duty for it shifts from your organization to another.

An instance 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 issues for you.

The same goes for the workplace. For example, you may outsource work – and the risks that come with it - to a contractor. In addition, you may adopt a hedging strategy in finance to protect your assets or investments.

Risk avoidance

Risk is eradicated by not taking any action that would mean the risk could ensue.

If you choose this approach, you aim to eliminate the possibility of the risk occurring. One example of risk avoidance would be an investment. If, after evaluating the risks associated with that investment, you consider it too risky, then you simply do not invest.

Treating risks by dodging them should be reserved for risks that would have a major impact on your organization if they were to occur. Still, if you avoid every risk you come up against, you may miss out on positive opportunities. You never know. That investment you determined not to make could have paid off. That is why it’s essential to thoroughly analyze risks and make the most informed judgment possible.

Risk reduction

Risk reduction definition:

 A risk turns less severe through actions to prevent or reduce its impact.

Risk reduction is a general strategy when it comes to risk treatment. It is sometimes called lowering risk. By selecting this approach, you will require to work out the measures or actions you can take that will make risks more compliant.

One example of risk decrease would be within manufacturing and the risk of products being produced to inaccurate specifications. A quality management system can decrease the chance of this happening, so this would be a risk-reduction method. In addition, in the finance industry, you may face risks associated with new regulations. Implementing a digital solution to support you manage regulatory needs can mitigate the risks of non-compliance and, therefore, also be an example of risk reduction.