Risk Management: Avoid, Reduce, Transfer or Accept?

Understanding Risk Management

When it comes to risk management, there’s no secret sauce. It’s a straightforward approach based on facts and probability. Managing risk is merely assessing possible exposures to your business operation and finding ways to navigate it with as little harmful impact on your company as possible.

Keep in mind that managing risk doesn’t always mean turning around and running the other direction from it. Perhaps that was our ancestors’ strategy, but fleeing modern danger or harm is far more manageable than in ancient times. We might face a “slip-and-fall” claim with a robust general liability (GL) policy and a keen lawyer — not a saber-toothed tiger at the killing end of our spear.

Best Risk Management Practices

Nevertheless, savvy leaders follow best practices in risk management just like in any other part of a business (i.e., marketing, sales, development, operations). There are four primary ways to handle risk in the professional world, no matter the industry, which include:

1. Avoid risk
2. Reduce or mitigate risk
3. Transfer risk
4. Accept risk

One of the key challenges associated with this four-step approach lies in determining the most suitable step for addressing specific risks. It’s important to recognize that each industry has its unique characteristics. For instance, within our client base, we cater to a wide array of businesses spanning SaaS, Fintech, Micro Mobility, Cannabis, and the Shared Economy. Despite this diversity, it’s worth noting that every company approaches risk assessment in its own distinct manner (a topic we will delve into further).

For instance, a Rideshare executive approaches risk retention in risk management from a distinct perspective compared to a SaaS industry leader. A delivery driver confronts various vehicular challenges during their routes, while a program developer is more inclined to encounter cybercriminals. The astute company leaders acknowledge the necessity of tailoring their risk management strategies, understanding that it is impractical for both enterprises to address risk in an identical manner. This underscores the importance of implementing highly customized risk retention in risk management practices.

A pro tip is to start big and go small. In other words, identify your industry risks and then hone in on the micro-risks your particular business might face.

How to Avoid Risk

As mentioned, gone are the days of hightailing away from all perceived danger. However, some situations call for an avoidance approach to risk management. If the activity has a high likelihood of occurring, and it will also cause significant financial harm, it’s better to avoid it entirely.

Local and nationwide regulators make it easy to avoid risk in specific areas. When regulations and rules apply to your industry, one significant risk is breaking the law. Avoiding this risk has an easy answer: don’t break the law. By following the guidelines regulators establish, you avoid the risk of fines, penalties, and defense costs.

How to Reduce Risk

Reducing risk means understanding the activities with a high likelihood of occurring but with a manageable financial impact. Some would argue that risks in these categories have a low impact — and yet, even a little financial impact hurts to some extent.

An excellent example of this revolves around the cybercriminals mentioned before. Industries like fintech and SaaS grow from a technological backbone. In other words, only a world filled with the aspect of “cyber” can host Fintech or SaaS companies. Therefore, the most significant danger to these companies is undoubtedly cybercriminals.

As a result, many companies embrace a risk management plan to reduce their exposure to these vicious online outlaws, including:

• Establish identity management
• Support security awareness
• Correct security flaws

Bear in mind that while these top cybersecurity practices can’t completely thwart cybercriminals from targeting your business, they do substantially reduce the risk, especially when it comes to safeguarding your financial assets, such as those related to bor finance.

How to Transfer Risk

If a financially devastating activity could potentially occur, the best option is to share the risk. Handling it alone could result in significant setbacks, if not a shuttered business. Most of the time, risks in this category are highly unlikely to happen. However, the possibility is still there, and transferring the risk is the safest bet. In the cannabis industry, it’s not uncommon to have massive growing plants and distribution hubs. Expensive equipment, valuable products, and customized buildings make up parts of what a cannabis company protects.

One weekend fire or violent storm could wipe out an entire building, costing loads of cash for restoration and lost production time. Instead of keeping fingers crossed, a better approach is to invest in property insurance. This coverage reimburses for direct losses a company experiences. It’s an “indemnity” policy, meaning it doesn’t require legal action to trigger coverage. When the risk is massive, but unlikely to occur, transferring it is the way to go. This approach helps companies avoid the potential financial hardships that may result from catastrophic events and also provides an insurance audit meaning businesses can better plan for their future financial stability.”

In the cannabis industry, it’s not uncommon to have massive growing plants and distribution hubs. Expensive equipment, valuable products, and customized buildings make up parts of what a cannabis company protects. One weekend fire or violent storm could wipe out an entire building, costing loads of cash for restoration and lost production time.

Instead of keeping fingers crossed, a better approach is to invest in property insurance. This coverage reimburses for direct losses a company experiences. It’s an “indemnity” policy, meaning it doesn’t require legal action to trigger coverage. When the risk is massive, but unlikely to occur, transferring it is the way to go.

How to Accept Risk

It’s not always that businesses can avoid, reduce, or transfer risk. Sometimes, you must buckle down and accept it. If accepting the risk is more profitable than any other option, then it’s the optimal strategy. After all, every industry has unavoidable risks that come with the territory. What’s more, although a risk is a jagged pill to swallow, some risk is necessary to do business in the modern world.

Shared Economy, for example, presents a unique situation. Without vehicles — automobiles, e-scooters, bicycles, etc. — most on-demand services wouldn’t even exist. But the risk of using this equipment outweighs the reality of not using them at all, and therefore, not having a business whatsoever.

The goal of accepting risk is to monitor them continually and adjust your risk management plan as the level of vulnerability changes, as it always does. Risk isn’t the four-letter word many individuals assume it is. Sometimes, it’s an avenue to success — the key is how risk is managed. However, it’s crucial to recognize that not all risks can or should be managed solely through insurance. For instance, certain liabilities and legal issues may fall under the category of risks that D&O insurance does not cover, highlighting the importance of a comprehensive risk management strategy beyond insurance protection.

Understanding the details of what coverage your fast-growing company needs can be a confusing process. Founder Shield specializes in knowing the insurance risk your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right risk management tool for you.