EMERGENCY RISK REDUCTION

My consulting company is called Risk Reduction Strategies. I gave it this name after careful consideration.

What is risk? Risk is the probability of something negative happening in the future, which will cause loss, harm, or suffering. Although risk is part of everyday life, risk can be “managed”. Risk management is the identification and prioritization of risks, after which resources are applied to diminish the negative impact and maximize the positive opportunities related to the risk. In other words, risk is not always negative. However, risk management is most often associated with uncertainty in financial markets, project failure, legal liabilities, credit risk, accidents, or natural disasters.

Basically, there are four ways to address or to “treat” risk. First, risk can be avoided. We can assess a property or business and decide not to buy, thereby avoiding risk associated with the purchase. We chose not to fly if we wish to avoid risk associated with flying.  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. When we acknowledge that risks can be positive or negative, optimizing risks means finding a balance between negative risk and the benefit of the operation or activity.

Secondly, risk can be accepted or ‘retained’. This may be well-founded if it is ‘calculated’. I may build a home without the extra costs of earthquake-resistant construction if the home is in a relatively low-seismic area such as, say, Minnesota.  A college student may accept no life insurance, since the “risk” of dying at the age of 19 is statistically low.  He is effectively ‘self-insured’. This category also includes risks that are so large or catastrophic that they either cannot be insured against, or the premium cost would be infeasible. ‘Acts of God’ or armed conflict may fall into this category.

Thirdly, risk can be transferred or “shared”.  If my home or business is destroyed or damaged in an event, a contract (i.e. policy) will stipulate the level that the dwelling and/or contents will be replaced, since I have “transferred” the risk to the insurance company. This assumes the policy is carefully written, and the company remains solvent — yet another risk. Another example is ‘outsourcing’. My brother raises young beef in South Carolina, and then contracts the animals to a grower in Iowa, where they are finished off before

Fourthly, we can reduce, or “optimize” the risk.  The most effective way is to eliminate the hazard associated with the risk. Without even knowing it, someone living in the Caribbean has eliminated the risk of a severe winter storm. Likewise, a person living in northern Canada has eliminated the risk associated with a severe hurricane. However eliminating risk is often too costly or impractical. The more feasible option is to mitigate, or reduce the impact of the risk.  Risk reduction or “optimization” involves reducing the severity of the likelihood of the loss occurring. For example, a sprinkler system within the office reduces the risk of loss by a fire. Buckling your seat belt reduces your risk of injury from an automobile accident.  Most of us reduce risks dozens of times during the day without even knowing it.

Each of the four risk treatments is valid for specific instances. We can avoid, share, retain, or reduce. However, I believe that the prudent, sensible, and practical approach is to reduce risk wherever possible. This is why  my company is called “Risk Reduction Strategies”. I am here to partner with you toward this goal.

Monty