5 Basic Methods for Risk Management

Introduction

Risk management is a way or specific precaution to deal with a situation that may be harmful to an individual or an organization. In this article, we will discuss a brief introduction to risk management and the best way to deal with risk management. The article also covers the best five methods for risk management.

What is Risk Management?

Risk management refers to identifying, analyzing, and mitigating risks to minimize potential losses and maximize opportunities for an individual, organization, or project. It involves identifying potential risks, assessing their likelihood and impact, and implementing strategies to minimize or eliminate them.

Risk management techniques are mostly used in the financial world, but nowadays, they are also used for managing personal life and maintaining health.

Here are the 5 methods of Risk management: Avoidance, Retention, Sharing, Transferring, and Loss Prevention & Reduction.

1. Avoidance

Avoidance is a strategy for reducing risk by preventing you from participating in activities that increase your risk of getting hurt, ill, or even dying. One such behavior is stop smoking cigarettes, as stopping them may reduce the risks to one's health and finances.

Sometimes, it may not be possible to avoid risk completely, or you may be able to deal with it altogether. Therefore, to overcome this, risk cannot always be avoided, but it should always be considered a possibility.

Companies that provide life insurance reduce this risk by charging smokers higher premiums than nonsmokers. Health insurers often raise premiums by age, location, family size, and smoking status under the Affordable Health Care Act, generally called Obamacare. A smoker's premium may be increased by up to 50% under the legislation.

For example: To reduce the risk of vehicular accidents during bad weather, Physical plants, for instance, can delay releasing vehicles for travel until the weather clears. On campus, some buildings may experience recurring or over-flooded water issues. Some water damage claims might be prevented by forbidding the storage of documents or supplies in those locations.

2. Retention

In risk management, retention refers to the assumption of risk by an individual or organization. This means that the individual or organization is responsible for any losses rather than transferring the risk to an insurance company.

There are several reasons why an individual or organization might choose to retain risk. For example, the insurance cost may be too high, or the risk may need to be more significant to be worth insuring against. Additionally, some individuals and organizations may prefer to retain risk to maintain control over their management.

The initial risk is the added expense of paying extra medical bills out of pocket if health problems develop. Health insurance benefits can cover most of the costs above the deductible amount if the condition worsens or becomes life-threatening. Suppose a person has no significant health difficulties that might necessitate extra yearly medical spending. In that case, they can avoid making out-of-pocket payments, reducing the overall risk- a higher deductibility rate.

Even though there are other ways to handle the risk, it may be more cost-effective to keep all or part of the risk, depending on how frequently and severely the hazards are expected to occur. For instance, due to the difficulties in identifying and assessing each of these many types of structures, the University retains the risk of loss to fences, signs, gates, and light poles separately.

3. Sharing

The possibility of loss to both people and property can be spread around. Sharing risk may involve duplicating records and papers and keeping duplicate versions elsewhere. A tiny fire in a single room can completely wipe out a department's operational records. Likewise, placing individuals in many buildings instead of using a single facility will help spread the risk of probable fatalities or injuries.

Employer-based benefits that enable the business to split the cost of insurance premiums with the employee are frequently used to spread risk. It is believed that when more people share the risks, the cost of premiums often decreases proportionally. When feasible, it may be best to share the risk by selecting employer-sponsored health and life insurance plans.

4. Transferring

Risk can occasionally be transferred to another party, usually through a contract. To transfer the risk of the event from the university to the facility user, outside organizations that utilize university facilities for open events must show proof of insurance and add the university to their policy as an additional insured. Purchasing insurance is also a risk transfer because the insurance company contractually shifts the financial risk of loss from the insured firm by the policy. Insurance should only be utilized as a last resort after all other options have been considered.

Health insurance usage is an example of risk transfer because the insurer assumes the financial risks related to providing medical treatment on behalf of the policyholder. Insurance firms take on the financial risk in return for a premium payment and a written agreement between the insurer and the policyholder. All requirements and conditions that must be met and maintained in order for the insurer to assume financial responsibility for the risk are set out in the contract.

5. Loss Prevention and Reduction

The purpose of this risk management method is to help reduce the chances of loss rather than eliminate the risk of loss. This approach aims to reduce loss in advance. A person or organization may be aware of the threat and so may be concerned about stopping the damage and preventing it from increasing. Preventive care in health insurance is an example of this method of risk management.

Health insurance companies promote preventative care visits, which are frequently co-pay-free and allow members to have annual checkups and physicals. Insurance companies know that identifying potential health problems early and providing preventative care can save long-term medical expenses. As an additional preventative measure to reduce costs to keep members active and healthy, many health plans also offer discounts to gyms and health clubs.

What are the essential risk management tools?

The planning and development of all departmental and unitary programs and activities should include the identification and assessment of risks.

Consider the following actions to determine the risks presented by a program or activity:

• Find out what tasks are included in the activity or program. For instance, a lab experiment may involve going to an off-site location, getting ready for the experiment, carrying it out, cleaning up after it, and getting rid of any trash.
• Determine the risks involved with each task. It is crucial to fully understand the duties at hand as well as the dangers they pose. Unknown risks are sometimes impossible to handle! For example, risks associated with the experiment may be due to inadequate equipment and incorrect setup.
• Analyse and choose risk management strategies. The intention is to perform the program or activity in a way that lessens the possibility of things going wrong and lessens the severity of any losses if it does. For instance, the risks associated with setting up the experiment may be reduced by providing training and oversight, setting up multiple experiment stations so that not every student is working at the same station, and bringing extra equipment.
• With the chosen risk controls or transfers, evaluate the risks connected to the program or activity.
• Depending on the risk assessment, decide whether to change or continue the program or activity.
• Use your chosen risk management strategies, then monitor the results. It is crucial to identify who will carry out the chosen risk management procedures and establish a completion timeline.
• After using the proper risk management approaches, "frequency" and "severity" are used to gauge the level of risk still present.
• If there is a high possibility or frequency of losses, such as catastrophic injuries or fatalities, extensive property damage, or significant operational interruptions, it is best to steer clear of activities or programs that incorporate those jobs. Activities with a high severity of loss but a moderate or low frequency of loss should, at the very least, be closely supervised and involve liability waivers from participants.
• The majority of the University's programs and activities involve duties that carry a moderate risk of loss, such as minor accidents, property damage, or business interruptions, and a moderate or low loss frequency. But, these activities need to be well-planned and under suitable supervision.
• There is relatively minimal risk management needed for activities or programs with a negligibly low possibility of loss and a minor high severity of loss, such as injuries that need first aid or minor medical attention and little to no property damage.