What Are the Common Ways to Respond to Risk Management

There are three standard ways to deal with risk:

1. Prevention — eliminating the cause before it is an issue

2. Mitigation — completing tasks to lessen the risk such as implementing a new strategy or purchasing insurance so that the risk of loss is shared with outside investors

3. Acceptance — noting the risk and accepting any consequences it may entail Therefore, action plans could avoid the risk completely, reduce the risk, transfer the risk (insurance), or recognize the risk and take a chance. The key determinant as to whether to take a more stringent approach (e.g., prevention) is dependent on the cost benefit relationship surrounding that risk.

The following corresponds a response for each known/unknown risk category:

§ Known risks. If the effect of the risk is large, chart a new strategy to prevent the risk or, if the risk effect is small, mitigate or accept the risk.

§ Unknown/known risks. First, estimate the effect of the risk and, depending on the projected risk magnitude, use the strategies explained for “known risks.”

§ Unknown/unknowns risks. As much as the likelihood and magnitude of this risk cannot be predicted, it is wise to add a contingency estimate to the project — for example, adding 10 percent of cost to a financial plan for “contingency allowances” without knowing exactly where this reserve will be applied.