How can risks be reduced

This evaluation of financial risks is one of the most important and most difficult aspects of a risk management plan. However, it is crucial for the well-being of your assets to ensure you understand the full scope of your risks. Financial diversification is one of the most reliable risk reduction strategies. When your financial risk is diversified, the adverse side effects are diluted. Suppose the investor diversifies his portfolio and invests in various sectors of the market. However, he currently faces systematic risk due to an economic downturn.

The investor may reduce his risk through a hedge. For example, the investor can protect his long positions and reduce his risk by buying put options for his long positions. He is protected from a potential drop in his portfolio value because he is able to sell his stocks at a predetermined price within a specified period.

The investor who avoids the risk forfeits any potential gains the oil stock may have. On the other hand, the investor who reduces his risk still has potential gains.

If the stock market goes higher, his long positions will appreciate in value. However, if his positions decrease in value, he is protected by his put options. Prevention vs. It may come down to just the level of risk involved, and how an investor ultimately diversifies his portfolio.

Here are some pros and cons of risk avoidance vs. Closes the door on opportunities for future gains, especially potentially higher returns on investment.

Seeks a "best of both worlds" approach to mitigating risk, while exposing yourself to potentially high returns. Each investor should weigh the scenario at hand, level of risk, and decide whether prevention vs. A few kinds of risk reduction strategies include diversifying your portfolio to balance out risks and reducing risk through hedges. Risk avoidance and elimination are frequently grouped together: unlike risk mitigation, investors who choose to avoid risk altogether will divest from certain investments and choose to switch strategies altogether.

Risk Management. Such reviews will identify improvements to the processes and equally they can indicate when a process is no longer necessary. For example, you may decide to accept a risk because the cost of eliminating it completely is too high.

You might decide to transfer the risk, which is typically done with insurance. Or you may be able to reduce the risk by introducing new safety measures or eliminate it completely by changing the way you produce your product.

When you have evaluated and agreed on the actions and procedures to reduce the risk, these measures need to be put in place. Risk management is not a one-off exercise. Continuous monitoring and reviewing are crucial for the success of your risk management approach. Such monitoring ensures that risks have been correctly identified and assessed and appropriate controls put in place.

It is also a way to learn from experience and make improvements to your risk management approach. All of this can be formalised in a risk management policy , setting out your business' approach to and appetite for risk and its approach to risk management.

Risk management will be even more effective if you clearly assign responsibility for it to chosen employees. It is also a good idea to get commitment to risk management at the board level. Insurance will not reduce your business' risks but you can use it as a financial tool to protect against losses associated with some risks.

This means that in the event of a loss you will have some financial compensation. This can be crucial for your business' survival in the event of, say, a fire which destroys a factory.

Some costs are uninsurable, such as the damage to a company's reputation. On the other hand, in some areas insurance is mandatory.

Insurance companies increasingly want evidence that risk is being managed. Before they will provide cover, they want evidence of the effective operation of processes in place to minimise the likelihood of a claim. You can ask your insurance adviser for advice on appropriate processes.

You can use a business interruption policy, for example, to insure against loss of profit and higher overheads resulting from, say, damaged machinery. Liability insurance - public and products liability insurance - is designed to pay any compensation and legal costs that arise from negligence or breach of duty.

Group life assurance is provided by employers as part of a benefits package and pays out a lump sum to an employee's family should the employee die. Our information is provided free of charge and is intended to be helpful to a large range of UK-based gov.

Because of its general nature the information cannot be taken as comprehensive and should never be used as a substitute for legal or professional advice. In addition, not all risks can be completely avoided, such as the risks of illness or natural disaster. Avoidance may be appropriate for a limited number of risks that produce a high probability of loss, such as gambling , but it is not a practical solution for most risks. In some cases we may even create additional risks by trying to avoid a particular risk.

For example, we may be tempted to keep all of our savings in cash to avoid the risk of investment losses, but then we would be subjecting ourselves to the potential risk of loss by inflation, which is practically guaranteed to significantly erode the value of our cash over time.

If we are unable or unwilling to avoid an activity, we can take steps to reduce the probability and potential severity of loss associated with the activity. For example, when we choose to drive, we can reduce the risk of being involved in an automobile accident by observing the speed limit and other traffic laws, not texting while driving, and not driving while drowsy or drunk. We can also reduce the severity of injury to ourselves in the case of an accident by always wearing our seatbelts and by driving vehicles with airbags.

Other common examples of risk reduction include installing burglar and fire alarms, building locked fences around pools, and visiting the doctor once a year for a physical exam. When investing, we can reduce risk through proper due diligence, diversification, seeking the advice of qualified experts, and investing primarily in that which we understand or can control to some extent. Another way to deal with risks we are unable or unwilling to completely avoid is to transfer them to a third party.

We can transfer risk in several ways, but the most practical, cost-effective, and common approach for high-severity risks with a low probability of occurrence is through insurance. The most effective use of insurance is to cover only the unlikely potential losses which would financially devastate us if they occurred.

Water damage — Ensure areas with water pipes are kept above freezing point to prevent frost damage and lag any external pipe work. Evaluating whether gutters, downpipes and storm drains can cope with heavy rainfall and making the necessary alterations will also minimise the risk of water damage.

Drains and gutters will also need to be inspected and cleaned out regularly. Finally, ensure any vulnerable stock is stored at least mm above the floor. Improving perimeter security, installing barriers and screens and using security personnel and contractors will also minimise the risk of burglary or theft. If you would like further advice on risk management, the following links may be of interest: Health and safety executive website , where you will find industry specific advice As well as the top 10 risks mentioned above, be aware of other risks to your business.

Good general guidance is available via Business Link The Institute of Risk Management provides a useful free risk management guide. Categories Insurance FAQs. HR tips. Need some help? Follow us Facebook Twitter LinkedIn.