Risk management involves identifying, evaluating and addressing the various risks an organization faces. These include financial, legal, security and strategic risks. This article will explain what a risk management strategy is and spotlight five examples of risk management strategies.

What is a risk management strategy?

A risk management strategy reflects an organization’s plan to identify and respond to risks. Such a strategy can apply to different categories of risk, and an organization may have different strategies for different types of risks. A strategy may address constraints, decision-making criteria and context-specific risk tolerance.

Why is risk management important?

Risk management enables organizations and individuals to prepare for contingencies and avoid damages to profits, investments and reputation. An effective risk management strategy allows a business to weather obstacles, define objectives and unlock opportunities.

Harika Rao, associate dean and associate professor at Lynn University’s College of Business and Management, says, “By identifying and evaluating risks early, companies can put measures in place to reduce the impact of unexpected events, whether those are financial losses, operational disruptions or damage to their reputation.”

This can help organizations now and in the future. “A clear approach to managing risk reassures employees, customers and stakeholders that the organization is stable and well-managed,” Rao says. However, Rao cautions against any attempt to isolate risk management to one area of a company, saying the practice “doesn’t reside or become the responsibility of one department. It is a collective effort involving many, if not all, team members across an organization.”

5 risk management strategies

There are five common risk management strategies:

1. Risk avoidance

Some risks are unavoidable, and taking certain risks may present opportunities to achieve great rewards. However, developing a detailed strategy could help an organization avoid unnecessary risks.

2. Risk retention

Also referred to as risk acceptance, this occurs when an organization or individual determines that a certain level of risk is acceptable. For example, if a business forecasts that a project's expected profits are greater than the assumed level of risk, then it and its shareholders are likely to accept that risk.

3. Risk sharing

Sharing risks distributes the potential damage among multiple parties. Each participant owns some of the risk, including shareholders, different departments and third parties, such as vendors. All parties share the gains or losses.

4. Risk transference

It’s also possible to transfer risk to another party. For example, a business can pay a premium to an insurance company so it will cover the costs of damages and liabilities if a given risk is realized. This allows organizations to protect themselves in case of an emergency.

5. Loss prevention and risk reduction

Reduction, also referred to as risk mitigation, involves developing methods to reduce the effect of risks. A company may list the known risks it faces and prepare a response for each.

Risk management in different industries

Risk management strategies are common in numerous sectors, and businesses in multiple fields may hire a risk manager. Some industry examples of risk management include:

Automotive and manufacturing

Rao believes the manufacturing industry, especially automotive manufacturing, is a current example of the importance of risk management.

"The ongoing global shortage of semiconductors has been a big problem," says Rao. "It’s caused delays and lost revenue.” She states that the pandemic and geopolitical issues have shown how vulnerable supply chains can be. It's because of risk factors such as these that companies need to plan by diversifying suppliers or using better forecasting tools.

Finance

In finance, successful risk management balances risks and rewards. For example, a business can balance volatile investments by also investing in more conservative options.

Health insurance

The health insurance industry is an example of risk transference. Insurance companies take payment for accepting the risks of their customers. With health insurance, companies assume the financial risk of paying for a customer’s future health costs in exchange for a premium the individual pays to the company. Insurance companies use statistics and algorithms to determine how much to charge based on the likelihood of the amount they will have to pay out to cover the insured’s health costs.

Farming

In agriculture, businesses, individual farmers and investors often diversify their crops or livestock. This spreads the risk around, increasing the chances that at least one crop will yield significant revenue. For example, if weather conditions hurt one crop, another may grow well, easing the losses caused by the first crop. Furthermore, if a favorable growing season among farmers everywhere leads to a surplus of one crop, those prices may go down. By investing in a lesser-cultivated crop, a business can still make a profit.

Rao points out how environmental concerns underscore the importance of risk management in agriculture. “Climate change and extreme weather keep hitting hard, affecting everything from farming to shipping. The costs from natural disasters have been staggering year after year, pushing companies to rethink how they prepare for emergencies and protect their assets.”

Construction

Construction companies face multiple risks. As with any business, there are financial risks. But in construction, there are also safety risks to workers, environmental risks to the area surrounding a construction site and legal risks that can delay and complicate projects. To manage these risks, construction firms often develop a risk management plan. These plans identify potential threats, prioritize them in order of seriousness and draw up strategies to respond to them if they materialize.

Marketing

Successful marketing teams often consider potential risks and how to respond to them when drafting marketing plans. Marketers consider risks such as:

  • Reputational risks: A poorly received marketing campaign can damage a brand’s reputation.
  • Narrow marketing scopes: Being too risk-averse can cause marketers to narrow their marketing strategy too much, limiting its efficacy.
  • Unclear brand messaging: If marketers don’t have a clear message to center their language around, they can confuse consumers. Similarly, marketers must know their target audience. Otherwise, their messaging might be ineffective.
  • Incorrect pricing: When starting a new marketing campaign, it’s often beneficial for marketers to work with operations teams to establish a pricing strategy in tandem with a marketing plan.
  • Affiliate risks: Marketers often weigh the risks of associating their business with another brand before entering into affiliations.

Gaining experience to make risk management decisions

Studying business enables aspiring professionals to learn skills that can be useful in developing risk management strategies. Different business degree programs prepare students for various careers that may involve risk management. An entrepreneurship degree can also teach aspiring businesspeople valuable skills and knowledge that can help with risk management.

“The curriculum at Lynn University's College of Business and Management is designed to empower students to learn the importance of risk management, strategies, developing a plan and techniques to communicate with teams,” says Rao. She also emphasizes that risk management is a core component when building a business. Lynn's College of Business and Management teaches risk management “in all core courses in various contexts,” she says.

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