risk management

1. Risk Avoidance

If the target can be removed, the risk can be avoided altogether.

Risk Avoidance is the most basic of concepts when thinking about risk management. Simply put, if you can remove the target from the equation, then the risk can be avoided.

For example, say a dry cleaner takes in approximately $5,000.00 in receipts each day and would like to practice Risk Avoidance. When the business closes at 6:00 p.m. each night, the owner takes the monies to the night repository at the bank on their way home. Thus the risk of a burglary at the business during the night, where the money would be the target, is avoided altogether when the receipts are removed from the premises and deposited into the bank.

The second example pertains to homeowners. Many clients we see have stamp collections, old or valuable documents, baseball card collections, coin collections, heirloom or antique jewelry and many other prized possessions. A simple method of practicing Risk Avoidance would be to remove those articles from home and store them in a bank’s safe deposit box, thus removing the articles from the premise will avoid the risk.

2. Risk Reduction

When Risk Avoidance is impractical, seek to reduce the risk.

With Risk Reduction, as the principal suggests, we are reducing the risk. This is the most common approach. By reducing the risk, we are admittedly taking some risk. Once again, see the examples below to help understand the concept.

Risk Reduction Example

Let’s return to the dry cleaner mentioned in the Risk Avoidance example. With all of the previous day’s proceeds being deposited in the bank each night, the business’ opening the following day is dependent on the bank’s operating hours. In other words, the business cannot open until the bank does to obtain cash to begin operating for the day. A Risk Reduction Strategy would be to keep some small cash reserve in the store overnight to begin operations the following day, such as $250 instead of depositing all of the money in the bank overnight, some are kept at the store. Thus reducing some of the risks of losing all of the money.

Much like the proceeding business example, we return to the coin collection or card collection that may be kept at home. In Risk Reduction, we would not keep the collections at the bank’s safe depository all of the time, but only keep them there during extended out of town trips to allow the owner of the collection the ability to share these collections with his friends or to potentially offer to sell these collections without having to visit the bank. When the inconvenience is experienced going to the bank safe deposit box every time the owner wishes to show, sell or attempt to sell one of his cards or coins, they are forced to conform to banking hours versus their schedule limitations. By assessing security vulnerabilities, they end up deciding that the security risk at his home where the cards or coins will be kept is not that significant during hours of traditional residential burglary (day-time, business days while people are working or at school); and therefore decides to spread his risk by moving the cards/coins back home.

Safe deposits are a security tool that can be used for temporary as well as long-term security purposes. Anything small, valuable or important can be stored there.

3. Risk Spreading

When Risk Removal or Risk Reduction are not appropriate solutions consider Spreading the Risk.

Risk spreading includes physical, procedural, and electronic security modifications to help manage the risk. Again see some of our examples below.

Back to our ongoing business example, we present a simple example of Risk Spreading. Owing to the $250 (Risk Reduction) being kept on the premises overnight, the store owner decides to install an electronic business security system to alert him and the authorities should a criminal try to break-in to the store after hours, a form of Risk Spreading.

Another example of Spreading the Risk would be to take the $250.00 that is left overnight and locate it in 3 different areas in the store, but not in a cash register drawer.

And in our residential example, the homeowner also decides to have a home security system installed and connected to a central monitoring station as well to alert the authorities as well as himself should someone try to break into the home when he is not home. Again, another example of spreading the risk.

Examples of other measures both physical and procedural are as follows:

Electronic Systems

  • Access Control Systems
  • Surveillance Systems
  • Enhanced night time Lighting

Physical Systems

  • Locks
  • Inner Perimeter Doors
  • Windows
  • Walls
  • Fences
  • Security Personnel
  • Armored Car Services
  • Landscaping

Procedural Systems

  • Lock and Key Control
  • Opening and Closing Policies
  • Issuance of Access Control Cards
  • Access Codes for security system
  • Property Receipts
  • Sign-in/out Procedures

4. Risk Transference:

If the above risk reduction measures are not working, consider transferring the Risk.

When the valuables or assets being protected cannot be removed, risk cannot be reduced to an acceptable point, and risk spreading still does not bring about full security satisfaction, the next step is to transfer the risk. Examples follow:

Because it’s so basic, this time, we are going to pursue the residential example we have been utilizing throughout this article. In addition to all of the steps above being taken by the owner, he is going to transfer some of the risks by ensuring the collection, probably as a rider on his homeowner’s policy.

This is an easy concept to grasp. We all have an auto, home, renter, life or health insurance in one form or another. We pay insurance premiums based on calculated risk and the sharing of the cost with a larger group, thereby transferring our risk to the insurer. In all likelihood, the policy on the cards may be high owing to the portability of the item.

5. Risk Acceptance

In some situations, it is almost impossible to transfer or remove the risk, and in some cases, it is too costly as well.  In those cases, a certain amount of risk will have to be accepted.

Sometimes, the “system” requires us to accept some of the risks, and other times it is just the most cost-effective thing to do. The following examples should result in a quick grasp of the accepting risk.

Again about our homeowner that has a card collection or a coin collection…As you have followed the development of this section, you can likely guess what the example will be. For the owner of the baseball cards, it is likely that the insurance company will require a sizable deductible to add the cards to his policy, requiring the owner to assume some risk.

Deductibles are designed to get the subscriber to assume some of the risks as well as to deter fraudulent claims. Our owner will likely agree to a high deductible since he is so security conscious. It is likely too that the insurer will consider all of the other steps being taken by the card owner when determining what the premiums will be. By accepting the high deductible, the owner is now accepting some of the risks.

Stuart Forchheimer
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