Question

Discuss the three risk mitigation strategies, providing an example for each.

Answer 1

Risk mitigation is a term used to describe different ways of dealing with risk. The purpose of risk mitigation is to reduce the possibility that risk event will occur or to reduce the impact of the risk event if it does occur.The risk mitigation strategies are as follows:

1. Risk Transfer

2. Risk Avoidance

3. Risk Acceptance

We will discuss them in detail

1. Risk Transfer: This strategy involves transferring the risk to a third party. Risk transfer typically takes place by paying premium to an insurance company in exchange for  protection against substantial financial loss.

Eg: A manufacturing company usually buys a fire insurance policy in order to protect itself from the event of fire damaging its production facility

2. Risk Avoidance: Sometimes the company may choose to avoid the risk completely. This typically happens when the company assesses the risk event is too risky.

Eg: A company may not launch a new product in to the market after its initial research shows there is not enough demand for the product.

3. Risk Acceptance: The company will retain a certain amount of risk brought on by a certain project in anticipation of profits outperforming the risk involved. This is done when the risk is too small or highly unlikely.