What is 'Accepting Risk'

Accepting risk occurs when a business 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. It posits that small risks — ones that that do not have the ability to be catastrophic or otherwise too expensive — are worth accepting with the acknowledgement 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.

Breaking Down 'Accepting Risk'

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.

Accepting Risk: Some Alternatives

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."
  • 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."
  • Exploitation: Some risks are good, such as if a product it 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.

 

RELATED TERMS
  1. Risk Profile

    An evaluation of an individual or organization's willingness ...
  2. Country Risk

    A collection of risks associated with investing in a foreign ...
  3. Risk Discount

    A risk discount refers to a situation where an investor is willing ...
  4. Specific Risk

    Specific risk is a risk that affects a minimal number of assets.
  5. Pure Risk

    Pure risk, also known as absolute risk, is a category of risk ...
  6. Company Risk

    Company risk is the financial uncertainty faced by an investor ...
Related Articles
  1. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  2. Investing

    Balancing the Different Risks Investors Face

    One of the keys to investing successfully is to balance different types of risk.
  3. Tech

    The Importance of Healthcare Risk Management

    Risk management is especially important in healthcare because human lives might be on the line. Here are some strategies to map out a plan.
  4. Investing

    Using Logic To Examine Risk

    Know your odds before you put your money on the table.
  5. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  6. Investing

    Elements of Insurable Risks: A Quick Guide

    Explore the elements of insurable risk: due to chance, measurable and definite, predictability, noncatastrophic, random selection and large loss exposure.
  7. Investing

    10 Risks That Every Stock Faces

    As an investor, the best thing you can do is to know the risks before you buy in. Find out about 10 common stock risks you should look out for.
  8. Investing

    5 Investing Risk Factors And How To Avoid Them

    Each investment product has specific risks that come with it, while some risks are inherent in every investment.
  9. Personal Finance

    Banker's Acceptance 101

    A banker's acceptance, or a negotiable time draft a bank guarantees to pay at a predetermined date, is a common way of financing international trade activity.
RELATED FAQS
  1. What are the primary sources of market risk?

    Learn about market risk and the four primary sources of market risk including equity, interest rate, foreign exchange and ... Read Answer >>
  2. What are the major categories of financial risk for a company?

    Examine four major categories of financial risk for a business that represent potential problems that a company may have ... Read Answer >>
  3. What are the different sources of business risk?

    Explore the various sources of business risk for companies and learn how critical risk management is to a company's financial ... Read Answer >>
  4. Why should investors be concerned with risk management?

    Learn what risk management is, the difference between systematic and unsystematic risk, and why investors should be concerned ... Read Answer >>
  5. How does market risk differ from specific risk?

    Learn about market risk, specific risk, hedging and diversification, and how the market risk of assets differs from the specific ... Read Answer >>
  6. What is backtesting in Value at Risk (VaR)?

    Learn about the value at risk of a portfolio and how backtesting is used to measure the accuracy of value at risk calculations. Read Answer >>
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center