Question

Describe the various Risk Treatment alternatives with examples (risk acceptance, risk avoidance, risk transfer, reduce consequence, reduce likelihood)

Please explain all of these throughly as I'm new to the topic and please give examples.

Answer 1

Risk Treatment alternatives

There is always a chance of risk in a business plan. Sometimes it is for good and sometimes it is for bad. What we can do is mitigate the risk and treat the risk. Risk treatment means finding options to mitigate the risk and developing and executing action plans.

The common risk treatment alternatives are:

1. Risk avoidance
2. Reduce consequence
3. Risk acceptance
4. Risk transfer
5. Reduce likelihood

1. Risk avoidance

Avoiding risk is the easiest way to treat it. Risk avoidance is taking steps to completely address that risk so that it can not occure at all. For example, when a tree on the road side is found week, it is cut and removed. Hence there is chance of the risk of falling down the tree on vehicles or on people.

In risk avoidance, business will completely avoid the plans which may cause a risk.

For example, as part of business development, there is plan to buy a new building. But, there is a risk that the location of the building is not good enough to generate revenues to meet the cost of the building. Hence the plan is avoided.

Risk avoidance is the most expensive risk management technique. But when comparing the cost of downtime due to risk, this cost is minimal. It is possible to choose an alternate plan which will give the same result and there is no chance of the risk.

2. Reduce consequence

To reduce the risk consequence, the business should ensure that all the controls are in place to minimize the harmful consequences.

For example, the organization has a rule to take daily backups of critical business data. When te risk of disk failure happens, the backups will help you recover the problem. Hence the harmful consequences of the risk disk failure can be reduced.

3. Risk acceptance

Risk acceptance means accepting the risk as it cannot be avoided cost effectively. Risk acceptance is also known as risk acknowledgement.

Risk acceptance is done when the cost of risk management options is more than the cost of the risk itself. It is not advisable to spend $50,000 to avoid a risk which will cost $5,000. Whenever the cost is more than the benefit, organizations will prefer to accept the risk rather than spending money to mitigate the risk.

Risk acceptance is the opposite of risk avoidance. Risk avoidance has early costs while risk acceptance has costs after the business interruption.

4. Risk transfer

Risk transfer means finding out some solutions to eliminate the risk by transferring it from one place to another. For example, in the business, if an asset is identified doubtful, sell it. Thus, the risk is transferred.

As part of risk transfer, certain functionalities of the business can be handed over to third party so that the company can focus on their core competencies.

An example of risk transfer is purchasing insurance services. In order to transfer the risk, you are paying money to some other company. In case of an IT company, if insurance is taken, the insurance company that will pay for losses when a business disruption occurs.

In this method, we try to spread the risk from one area to another sections so that the loss of an entire project can be avoided.

5. Reduce likelihood

Reduce likelihood or reduce chance takes place when risk avoidance strategy is failed. Here, business plans will be developed to mitigate the negative effects of the risk.

The factorss which will help to reduce the likelihood of occurrence of a risk are management controls and organizational arrangements to reduce the frequency of an error.