Once the risk exposures are identified, the next step is to choose the technique, or combination of techniques. Best suited to effectively eliminate or control the exposure. There are five basic risk control techniques. Some can produce the desired results in and of themselves; others work best when used in combination, dependent on the particular exposure being dealt with. There are basically two risk management techniques: risk control and risk financing.
Risk control refers to techniques that reduce the frequency and severity of accidental losses. Risk control involves identifying the organization’s risk exposures, examining the various alternatives available to either eliminate those risks that can be eliminated or mitigate the effects of those that cannot be eliminated, selecting the best alternative or combination of alternatives to deal with each risk exposure, implementing the chosen techniques, and monitoring the process for the purpose of altering or improving the program based on the observed results. Risk financing is the method or methods by which an organization chooses to pay for those losses that result from the various risk exposures the organization faces. There are two ways in which the risk can be controlled.
The first is risk avoidance if a father is worried about his son’s motorcycle riding habits, he could ask his son to stop riding the motorcycle. This will ensure that the risk of an accident is avoided. This includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the legal liability that comes with it. Another would be not flying in order not to take the risk that the airplane is to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits. Voluntarily choosing to no longer participate in the activity that creates or causes the loss. If you no longer provide the service or perform the function that created the loss exposure in the first place, you are no longer faced with the exposure. Examples of risk avoidance would include disbanding a SWAT team or canine unit, refusing to allow civilian ride-along in patrol cars, prohibiting misdemeanor pursuits, or a prohibition on the carrying of blackjacks or sap gloves
For law enforcement, risk avoidance is not always an option. There are some things we just have to do, but it is nonetheless a desirable technique where its implementation does not significantly interfere with the delivery of vital and necessary police services.
The second is risk reduction- if the motorcycle riding cannot be stopped completely, the father can ensure that his son wears a helmet and also has speed restrictions. This will reduce the risk of an accident. Risk reduction or optimization” involves reducing the severity of the loss or the likelihood of the loss from occurring. For example, sprinklers are designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy. Reduction techniques can be implemented either before or after a particular loss occurs, in an attempt to reduce the amount of the loss or damages that may result. Sprinkler systems, fire extinguishers, soft body armor, and vehicle safety belts are examples of reduction measures. These activities are intended to minimize the potential severity of loss. They do not prevent the loss causing event from occurring.
Hazard prevention refers to the prevention of risks in an emergency. The first and most effective stage of hazard prevention is the elimination of hazards. If this takes to0 long, is too costly, or is otherwise impractical, the second stage is mitigation. Prevention involves measures or activities undertaken before a loss occurs, in an attempt to prevent the loss-causing event from happening, or to render its impact less significant. Examples of preventive measures are the creation and implementation of sound policies that provide appropriate guidance to line level officers, continuous and on-going m-service training, patrol cars equipped with prisoner screens, and the issuance of latex gloves for the prevention of infection. The primary objective of loss prevention is to reduce the frequency with which the loss causing event occurs.
If risk cannot be controlled, it is prudent to ensure that in the event of a risk occurring there is a mechanism in place to make good the financial loss. There are two methods of risk financing.
The first is risk retention -if the severity of financial loss is not high and where frequency of occurrence is high, it is better to retain risk. For instance, a company which provides medical benefits to its employees may decide not to opt for insurance for smaller sicknesses like coughs and colds. The company will itself bear the cost treatment for its employees. Risk retention involves accepting the loss, or benefit of gain, from a risk when it occurs. True self-insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any amount of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the organization to0 much.
The second method is risk transfer the same company will undertake insurance for those illnesses that cost a lot for treatment. In the event of an employee being infected by a major illness, the insurance company will reimburse the treatment amount. In this scenario, the company is transferring the financial risk to an insurance company. Ideal use of these strategies may not be possible. Some of them may involve trade-offs that are not acceptable to the organization or person making the risk management decisions..
Optimization of Risk
Acknowledging that risks can be positive or negative, optimizing risks means finding a balance between negative risk and the benefit of the operation or activity: and between risk reduction and effort applied. Modern software development methodologies reduce risk by developing and delivering software incrementally. Early methodologies suffered from the fact that they only delivered software in the final phase of development; any problems encountered in earlier phases meant costly rework and often jeopardized the whole project. By developing in iterations, software projects can limit effort wasted to a single iteration.
Outsourcing could be an example of risk reduction if the Outsourcer can demonstrate higher capability at managing or reducing risks For example, a company may outsource only its software development, the manufacturing of hard goods, or customer support needs to another company, while handling the business management itself. This way, the company can concentrate more on business development without having to worry as much about the manufacturing process, managing tne development team, or finding a physical location for a call center.
Risk sharing can be defined as “sharing with another party the burden of loss or the benefit of gain, from a risk, and the measures to reduce a risk.
The term of risk transfer is often used in place of risk sharing in the mistaken belief that you can transfer a risk to a third party through insurance or outsourcing. In practice if the insurance company or contractor go bankrupt or end up in court, the original risk is likely to still revert to the first party. As such in the terminology of practitioners and scholars alike, the purchase of an insurance contract is often described as a “transfer of risk.” Transfer techniques are used to transfer, or move, the risk from one party to another. The most common examples of transfer strategies are the use of waiver forms, hold harmless agreements, insurance policies, and contracting with others for services such as prisoner transports or lodging. Ideally, to receive maximum benefit from transfer arrangements, the organization strives to transfer both legal and financial responsibilities for an incurred loss, although this is not always possible. However, technically speaking, the buyer of the contract generally retains legal responsibility for the losses “transferred meaning that insurance may be described more accurately as a post-event compensatory mechanism. For example, a personal injuries insurance policy does not transfer the risk of a car accident to the insurance company. The risk still lies with the policy holder namely the person who has been in the accident. The insurance policy simply provides that if an accident (the event) occurs involving the policy holder then some compensation may be payable to the policy holder that is commensurate to the suffering/damage.
Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining the risk for the group, but spreading it over the whole group involves transfer among individual members of the group. This is different from traditional insurance, in that no premium is exchanged between members of the group up front, but instead losses are assessed to all members of the group.