What is Accepting Risk?
Definition: Accepting risk is defined as a risk management strategy in which a person or a business entity classifies the risk and declares it acceptable, thus making no effort to decrease it. The possible loss from the known and accepted risk is considered to be manageable.
It is one of the approaches to handling risks that states that a person acknowledges the known risk but would not take any action, since they can accept its consequence and possibility.
The logic behind the risk acceptance strategy is that the costs for reducing or avoiding risks are too great in comparison to the small probabilities of a hazard. For example, self-insurance can be understood as a type of risk acceptance while on the other hand insurance is understood as a transfer of risk to a third party.
Acceptance risk is an organizational risk identified, and the organization views no need to expend money and time decreasing the risk because its effect is bearable. Risk management aims to identify and devise meaning to fight the risk. A risk can be accepted, moved, and retained.
“Risk Retention” is another name for accepting risk, which is a feature of risk management usually seen in the commercial or investment sector. Risk acceptance is a plan, and it is accepted when it results in the most economical choice to do nothing about it. The business realizes that the risk is so tiny that they are ready to bear the consequences.
Understanding Risk Acceptance in Detail
Administrators and policymakers know that businesses have to face many business threats that can be dodged or eased about the level of development and the assigned resources. Numerous business enterprises approve various risk management methods to estimate and classify financial trouble possibilities for easier analyzing and managing.
By itself, businesses should find stability between the possible costs of an issue resulting from a known risk and the expenditure concerned with ignoring or else handling it. Any possible losses from a risk not recovered by insurance or completed the insured amount is an example of accepting risk. Kinds of risks include uncertainty in financial markets, legal obligations, project failures, natural reasons and disasters, credit risk, and aggressive competition.
It is important for a company to analyze the costs of managing risks against the returns from the venture. One of the key upsides of risk acceptance is its clarity that infrequent and small risks- that do not have the ability to be catastrophic (or otherwise too expensive)- should be accepted with the acknowledgment that any future risks can be handled- if and when they arise.
Such sorts of risk management techniques are also considered a valuable tool in the process of prioritization and budgeting.
Alternatives for Accepting the Risk
Although accepting the risk is known to be a suitable choice in many cases, there are alternative ways to lessen risks in risk management:
1. Avoiding Risk
Avoiding Risk needs changing plans to decrease risk, and this plan is beneficial for risk that could have a strong effect on business. Risk avoidance includes eradicating any activity that leads to any possible loss. It is perfect for risks that are probable to cause a severe effect on a scheme or business. Managers attain risk avoidance by policy and measures, training and education, and also, implementation of technologies.
2. Risk transfer
This process is used when many associates are included in a project; they can transfer or share the risks among themselves. It is also known as risk-sharing.
Risk transfer includes assigning risk from one party to another on an agreement basis. The acceptable risk-sharing assures that the responsibility for risk is allocated to the party in line with its ability to control and protect against the risk. Insurance companies usually use the process of risk transfer.
3. Risk mitigation
Risk mitigation includes restraining the consequences of a risk to handle. The strategy is usually attained through hedging.
Risk mitigation includes eradicating or reducing the effects of risk. Limiting the effect of risk so that if a problem arises, it will be easier to handle.
Accepting Risk Wrap Up!
On the concluding note, it is clear that organizations use a variety of techniques for managing risk, and accepting risk is one of the most popular ones in the cases when organizations think the risk is bearable.
However, for optimizing the risk management process, it is important for a business to identify the risks, assess their gravity, and then prioritize them for their effective monitoring. When it comes to managing the risks, managers need to be able to balance the costs involved in risk management with the costs caused because of the occurrence of the risk.
All in all, the concept of risk acceptance is considered appropriate for the risks that are small, bearable, and can be managed without much of a problem. So, you may choose this technique of risk retention for the risks that are relatively easy to deal with.
Now, after understanding the whole concept, what is your definition of accepting risk? Share with us in the comment section below.