In addressing an identified risk, which strategy aims to shift some of the risk to other parties?

  • risk avoidance
  • risk retention
  • risk reduction
  • risk sharing
Explanation & Hint:

Risk Sharing: As explained earlier, risk sharing involves distributing the risk among different parties. It is often used when a risk is too large for a single entity to bear alone. For instance, a company might enter into a partnership where both companies share the potential risks and rewards of a project. Insurance is another form of risk sharing, where the risk is transferred to an insurance company in exchange for regular payments (premiums).

Risk Avoidance: This strategy involves changing plans to avoid the risk entirely. For instance, if a business identifies a potential legal risk in entering a new market, it might choose not to expand its operations there. Risk avoidance is the most conservative approach to handling risk, and while it can be effective, it can also result in missed opportunities.

Risk Retention: Sometimes referred to as risk acceptance, this strategy means that the organization accepts the risk and decides to deal with any potential fallout internally. This is usually chosen when the cost of mitigating the risk may be more than the cost of the risk itself. Companies often retain risks that are not severe and are within their capacity to absorb.

Risk Reduction: This strategy aims to reduce the likelihood or impact of a risk. This can be done through implementing controls, safety measures, and policies. For example, a company might install fire suppression systems to reduce the risk of damage from a fire. Risk reduction doesn’t eliminate the risk entirely, but it helps to manage and minimize its potential impacts.

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