What Does Accepting Risk Mean?
Accepting risk, or risk acceptance, occurs when a business or individual acknowledges that the potential loss from a risk is not great enough to warrant spending money to avoid it. Also known as "risk retention," it is an aspect of risk management commonly found in the business or investment fields.
Risk acceptance posits that infrequent and small risks—ones that do not have the ability to be catastrophic or otherwise too expensive—are worth accepting with the acknowledgment that any problems will be dealt with if and when they arise. Such a trade-off is a valuable tool in the process of prioritization and budgeting.
- Accepting risk, or risk retention, is a conscious strategy of acknowledging the possibility for small or infrequent risks without taking steps to hedge, insure, or avoid those risks.
- The rationale behind risk acceptance is that the costs to mitigate or avoid risks are too great to justify given the small probabilities of a hazard, or the small estimated impact it may have.
- Self-insurance is a form of risk acceptance. Insurance, on the other hand, transfers risk to a third-party.
Accepting Risk Explained
Many businesses use risk management techniques to identify, assess and prioritize risks for the purpose of minimizing, monitoring, and controlling said risks. Most businesses and risk management personnel will find that they have greater and more numerous risks than they can manage, mitigate, or avoid given the resources they are allocated. As such, businesses must find a balance between the potential costs of an issue resulting from a known risk and the expense involved in avoiding or otherwise dealing with it. Types of risks include uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters, and overly aggressive competition.
Accepting risk can be seen as a form of self-insurance. Any and all risks that are not accepted, transferred or avoided are said to be "retained." Most examples of a business accepting a risk involve risks that are relatively small. But sometimes entities may accept a risk that would be so catastrophic that insuring against it is not feasible due to cost. In addition, any potential losses from a risk not covered by insurance or over the insured amount is an example of accepting risk.
Some Alternatives to Accepting Risk
In addition to accepting risk, there are a few ways to approach and treat risk in risk management. They include:
- Avoidance: This entails changing plans to eliminate a risk. This strategy is good for risks that could potentially have a significant impact on a business or project.
- Transfer: Applicable to projects with multiple parties. Not frequently used. Often includes insurance. Also known as "risk sharing," insurance policies effectively shift risk from the insured to the insurer.
- Mitigation: Limiting the impact of a risk so that if a problem occurs it will be easier to fix. This is the most common. Also known as "optimizing risk" or "reduction," hedging strategies are common forms of risk mitigation.
- Exploitation: Some risks are good, such as if a product is so popular there are not enough staff to keep up with sales. In such a case, the risk can be exploited by adding more sales staff.