There are basically five Methods of Risk Management or techniques can be used in the management of risks. Read more in our earlier articles in Business Training in Kenya. They include:
Methods of Risk Management
A person who is exposed to risk can handle the situation by avoiding any activity with which the risk is associated. It involves not performing an activity that could carry the risk. This tends to eliminate the chance that the person will suffer loss. It may also mean avoiding any property with which the risk is associated. But it must be noted that some risks like death are unavoidable. It is also necessary to take some risks in life to develop and prosper. A person who avoids all risks in life will never achieve anything. Avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.
Prevention and risk reduction
This technique involves taking deliberate measures to prevent the risk from physically causing a loss. It also includes measures intentionally to reduce the severity of the loss or the extent of loss. Examples include putting money in a safe to prevent thieves from accessing it. Having in place a sprinkler designed to put out a fire to reduce the risk of loss by fire.
This method involves accepting the loss when it occurs. It can also be referred to as acceptance of risk or assumption of risk. Risk retention can be in the form of simple assumption which means the risk is ignored and the person goes about his/her business as if the risk does not exist. You probably simply assumed death today and went about your duties as if the risk does not exist. It can also be in the form of self insurance. In this case there is a financial plan to deal with the loss if it occurs. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible like war.
It is done by causing another party to accept the risk, typically by contract or by hedging. Insurance is one type of risk transfer that uses contracts. Other times it may involve contract language that transfers a risk to another party without the payment of an insurance premium. Liability among construction or other contractors is very often transferred this way. On the other hand, taking offsetting positions in derivatives is typically how firms use hedging to manage risk. Outsourcing is another example of Risk transfer where companies outsource.
The impact of risk examines the effect of risks and hazards on enterprises.
Businesses always face the uncertainty of losses that may never occur. Each day, risks and hazards threaten business enterprises affecting them both positively and negatively in the some ways. Risks can also create opportunities for a business enterprise. But now we examine the negative impacts of risks on a business enterprise. The following are some of the negative consequences of risk on a business.
Cost to business: Risks cause losses. The actual losses may serious and crippling to a business or cause great financial hardship. The losses caused by risk may direct losses resulting from the occurrence of the risk or indirect losses such as loss of profits, loss of life, and disability.
Interrupting business operations: This occurs when whenever a business experiences some loss it cannot go on with the normal operations because some of its equipment was destroyed with the given risk that occurred
Reducing profits: Risks also reduce profits in that the profits that could have been realized are used in replacing the equipment that was destroyed and re-establishing the business
Limiting ability to compete and slowing growth.
Uncertainty: Most businesses face threats of losses that may never occur. This causes uncertainties in regard to the possibility of a loss.
Fear and worry. Even if no loss ever occurs as anticipated, at least two factors add to the cost of uncertainty. These are fear and worry. The time spent thinking about real or imagined chances of loss is expensive considering the many other things that could be done if there were no fear of loss. The cost of loss of peace of mind is great indeed.
Fear and worry may stop a business from engaging in certain profitable activities and otherwise alter how it conducts its operations.
Less than optimal use of resources: Investments are frequently influenced by the risks to which they are exposed. Some activities or investments are completely avoided because the exposure to loss is very high.
The amount of money “put away for a rainy day” is not readily available for investment and cannot be invested in a much more productive capacity.
Investments may be diverted to more liquid or safer types of assets than are really necessary. This results in reduced earnings which is an additional cost of risk.
Short- term planning: Risk causes the tendency to concentrate planning in the near future, rather than on the significant benefits of long range planning.
Conclusion on Methods of Risk Management
The method of risk management adopted by the organization depends on an organization’s policies and nature of activities. An organization should also deal with the impact of losses in case of any and reestablish business as soon as possible to avoid losing their clients. Methods of Risk Management are analyzed as above.