Companies and businesses face internal and external risks. These risks involve uncertainties that can impact a company’s operations adversely.
For companies to ensure survival and profitability, managing these risks is highly crucial. Every company has a risk management strategy that can help mitigate those risks. However, the process usually includes several steps.
Companies have several options when it comes to managing risks. Usually, these options fall under risk responses. For every perceived risk, companies must use an appropriate response to ensure the mitigation of risks.
In some cases, these risks may be highly significant. Therefore, the underlying company may need to eliminate them or reduce them to an acceptable level.
For other risks, the expected impact will play a significant role in how companies manage them. In some cases, these risks may be unimpactful. Similarly, the company may not have an appropriate response for them.
Therefore, they will have to accept those risks. Before understanding what accepting risks is, it is crucial to understand risk management and risk responses.
What is Risk Management?
Risk management is the process of addressing risks that companies face. These risks usually harm a company’s operations. Therefore, managing them is highly crucial for long-term survival and success. A company’s risk management process usually includes various steps. The most critical of these is identifying risks and assessing them.
The process of risk management varies from one company to another. Since every company has a different nature and procedures, their risks will differ.
Therefore, the steps used to manage those risks will vary based on the identified and assessed risks. However, the risk management strategy impacts how successful the company will be in mitigating those risks.
A risk management strategy provides a structured and coherent technique for identifying, assessing, and managing risks. Through this strategy, companies can offer companies a process to update and review risks regularly.
Companies usually have an overall risk management strategy that applies to the whole organization and operations. However, they will also have specific strategies for specific processes, departments, or projects.
However, risk management does not help in identifying risks only. It also provides a structure to calculate volatility and predict its influence on operations.
Then, it helps identify appropriate responses to the assessed risks. Usually, these responses differ based on a company’s tolerance levels to those risks. This tolerance level comes from historical strategies.
Overall, the risk management process involves identifying, assessing, and managing risks. This process occurs through the identification of an appropriate risk response.
As mentioned, this response will differ based on the level of perceived impact for those risks. In some cases, companies may not have any other option than to accept those risks.
What is Accepting Risk?
Accepting risk refers to the process of not introducing any responses to manage risks. Instead, it is when a company identifies risks and renders them acceptable. In some cases, these risks may not have any appropriate responses. Therefore, companies will not have any strategies to tackle them. Either way, accepting risks involves no responses against an identified risk.
Accepting risk is a type of risk response that companies use in one of two circumstances. As mentioned, the first includes the identified risks having a minimal or acceptable impact on operations.
The second involves those risks not having an appropriate response. However, accepting risks does not imply ignoring those risks. Companies must still monitor them if they materialize or increase insignificance.
While accepting risks is a type of risk response, it does not involve any actions taken by the company. It includes no efforts required by the company to manage them.
Therefore, accepting risk usually implies the absence of a risk response. For most companies, this process may include neglecting the identified risks until they become significant.
However, risk management is a continuous process. Companies may accept risks when they perceive those risks to have a minimal or acceptable impact.
However, this impact may increase in the future due to volatility. Therefore, companies must still monitor those risks to detect when to employ a different risk response.
Some companies will also develop contingency plans to mitigate the impact of the risk. However, these are not actionable steps but rather strategies for when the risks materialize.
Usually, accepting risks involves lower costs and efforts since companies don’t need to take any actions. Another name used for this response is risk retention, which implies the company retains those risks.
How Does Accepting Risk work?
The risk management strategy begins with the identification of risks that companies face. As mentioned, this process will differ from one company to another.
Since the nature and operations of every company differ from others, their risks will also vary. Therefore, the identification process will involve different steps to detect the uncertainties that impact a company’s operations.
Once identified, the next step is for companies to assess those risks. This process involves considering each uncertainty on its own and measuring its impact on operations. As mentioned, every company differs from others due to its nature. Therefore, the potential impact of those risks will also vary based on the company’s operations.
During the assessment process, companies will come across various risks with varying impacts. For most significant uncertainties, the process will involve identifying steps to mitigate them.
However, some risks may also have minimal impact. In those cases, companies may accept them. However, it does not imply the company forgets about those risks. Companies will still need to monitor those risks to detect any fluctuations in the impact level in the future.
Similarly, some risks may not have an appropriate response. These include risks that are unamenable or do not have an appropriate response.
In those cases, companies will also have no other option but to accept them. Therefore, accepting risks involves two scenarios. The first is when an identified uncertainty does not have a significant impact. The second occurs when there are no appropriate responses to those risks.
Accepting risks does not constitute a risk response. Instead, it implies there are no appropriate steps to mitigate or manage those risks.
Therefore, accepting risks indicates the absence of a risk response for an identified risk. However, it still forms a part of the risk management strategy. Companies still need to monitor accepted risks to identify any changes to the perceived impact.
What are the alternatives to Accepting Risk?
Accepting risk is a type of risk response that companies employ for any identified uncertainties. However, it is not the only option they have. Based on the level of perceived impact, companies may also use one of the other appropriate risk responses. These are alternatives to accepting risks, as discussed below.
For most companies, avoiding risks is the best option to manage risks. This strategy involves changing plans to ensure a specific risk does not impact operations.
However, avoiding risks is not always ideal. Similarly, it may not be possible for companies to do so without making significant changes. Avoiding risks, in general, leads to the lowest adverse impact.
Some risks may not be avoidable due to the nature of operations. Therefore, companies will seek to introduce strategies to fix them when they occur.
Mitigating risks involves optimizing risks or reducing them to an acceptable level. The most prevalent form of risk mitigation involves using hedging to restrain the consequences of a risk.
The final response to risks is transferring them. This process involves shifting the tasks that cause uncertainties to another party. Usually, this occurs when several parties are involved in an operation.
Transferring risks is a viable option when accepting, avoiding, or mitigating them is not possible. For example, outsourcing falls under this risk response.
Risk management involves identifying and assessing risks. Once done, it includes introducing an appropriate risk response to it. One of these responses includes accepting risks.
There are two situations when it may be necessary. The first consists of the perceived impact of the risk being minimal or acceptable. In contrast, the second involves no appropriate responses to the identified uncertainty.