Risk Management Process

Risk Reduction

For some risks, it might be adequate to simply try to reduce their potential for occurring. When you try to reduce a risk, you are taking action to lessen the frequency or severity of losses that may occur. For example, Janelle could make it a work-place policy that all of her employees wear seat belts when working. She may put locks on the storage building where she keeps her equipment.

Risk Assumption

For some risks, you will simply assume the responsibility and financial obligation. These are typically your less serious risks. Typically, people practice risk assumption when they have determined that insuring a risk would just be too costly and not worth the protection. For example, Janelle may decide not to have any auto insurance beyond what is legally required for her old truck. Even if you assume responsibility for a risk, you can be prepared. For example, she may want to set some money aside for repairs to the truck if it were to get into a wreck.

Risk Shifting or Risk Transfer

This is when you shift or transfer your risk to another party. You do this when you buy insurance. For example, when you have car insurance, you pay the cost of the insurance with the understanding that if something happens, the insurance company will help carry the burden of the financial consequences. She will likely pay for various types of insurance for her business including auto insurance and worker's compensation insurance, which will shift some of the risk to the insurance company.

Risk Avoidance

When you identify a risk, you can simply decide not to engage in that activity. For example, if Janelle thought that by skateboarding on the weekends, she was running too high of a risk of getting injured, she could simply stop skateboarding. Simple enough. Keep in mind that not all risks can be avoided, but some can.