What does it mean to accept the risk?
Risk acceptance occurs when a business recognizes that the potential loss of a risk is not large enough to justify spending money to avoid it. Also known as “risk retention”, it is an aspect of risk management commonly found in business or investment. He postulates that small risks – those that do not have the capacity to be catastrophic or otherwise too expensive – are worth accepting, while recognizing that all problems will be dealt with if and when they arise. Such a compromise is a valuable tool in the prioritization and budgeting process.
Accept the risk explained
Many companies use risk management techniques to identify, assess and prioritize risks in order to minimize, monitor and control these risks. Most companies and risk management personnel will find that they have greater and more risk than they can manage, mitigate or avoid given the resources allocated to them. As such, businesses need to balance the potential costs of a problem resulting from a known risk with the expense of avoiding or otherwise addressing it. The types of risks include uncertainty in the financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters and overly aggressive competition.
Accepting risk can be seen as a form of self-insurance. All risks that are not accepted, transferred or avoided are said to be “retained”. Most examples of companies accepting risk involve relatively low risks. But sometimes entities can accept a risk that would be so catastrophic that it would not be possible to insure it because of the cost. In addition, any potential loss of a risk not covered by insurance or greater than the amount insured is an example of risk acceptance.
Some alternatives to risk acceptance
In addition to accepting risk, there are several ways to approach and treat risk in risk management. They include:
- Avoidance: this involves modifying plans to eliminate a risk. This strategy is suitable for risks likely to have a significant impact on a company or a project.
- Transfer: applicable to projects with several parties. Little used. Often includes insurance. Also known as “risk sharing”.
- Mitigation: Limit the impact of a risk so that, in the event of a problem, it is easier to resolve. This is the most common. Also called “risk optimization” or “reduction”.
- Exploitation: Some risks are good, for example if a product is so popular that there are not enough staff to monitor sales. In such a case, the risk can be exploited by adding more sales staff.