Risk Retention vs Risk Avoidance - Medium

This risk management approach is an extreme opposite on the Risk Transfer approach in that it upholds the principle of taking responsibility for ... GetunlimitedaccessOpeninappHomeNotificationsListsStoriesWriteRiskRetentionvsRiskAvoidanceDoyourecalltheriskmanagementtechniqueoptionsavailabletofinancialinstitutionswhointeractwithdifferentlevelofriskintheiroperations?Let’sbuildarecapasafoundationfortoday’sfocus.Financialinstitutionsinpracticeofriskmanagementtechniqueareconcernedwithapproachestomanagetheirriskexposures.Theoptionsavailabletothemarelosscontrol,lossfinancingandriskreductionLossControl—*Safety*Controls*PrecautionsLossFinancing-*RiskRetention*RiskTransfer*HedgingRiskReduction-*Withdrawal*Diversification*RiskShareWediscussedextensivelyonalossfinanceandriskreductiontechniquebyexpoundingontheriskshareandrisktransferapproaches.Wewillcentertoday’sdiscussonanotherlossfinancingandlosscontroltechnique-RISKRETENTIONandRISKAVOIDANCE.RISKRETENTIONThisriskmanagementapproachisanextremeoppositeontheRiskTransferapproachinthatitupholdstheprincipleoftakingresponsibilityforone’saction.RiskRetentiontechniqueistheintentionaldecisionoforganizationstohandleopposingriskofafirminternallyratherthantransferringthemtoinsuranceoranyotherthirdparty.Bysodoing,theriskoftheorganizationisself-financedandmanaged.Inaccountingperspective,thisisdonebysettinganamount/accountasidecalledProvisioning.Theprovisioningaccountisusedtoservicebaddebts(defaultingloans).Theprovisionaccountisalossfinancing(reservefunds)accountthatpaysforthepotentiallossesarisingfromclient’sloandefaults.Organizationsmakedecisionstoretainriskwhenacostanalysisreviewshowsthatitiscosteffectivetohandletheriskinternallyasopposedtothecostoffullyorpartiallyinsuringagainstit.Companieschoosetoretainriskwhenthepremiumoftransferringthemissubstantiallyhigh.Youcouldrenametheriskretentionapproachasself-insurance.WhatFinancialInstitutionsactuallydo-TheRiskManagementCommitteestrikesabalanceindeterminingtheappropriatelevelofrisktransferorriskretentionfortheirorganization.Itisunwisetocompletelytransferyourriskandfoolhardiertototallyretainthem.Experiencehasitthatorganizationschoosetotransferhighriskoptionsandretainlowerrisk.Bysodoing,theypartiallyretaintheriskoftheirbusiness.Thereishowevernobestbrilliantwaytohandlerisk.Organizationsshouldworkwiththeirriskadvisortodeterminewhichrisk-financingoptionismostappropriateforthem.Theroleofriskadvisorsinthisbalancingactiscrucial.Experiencedriskadvisorscanhelporganizationsdeterminethebestrisk-financingprogramorstrategybyconductingadetailedanalysisoftheirriskmanagementprofile,risk-takingphilosophyandappetite.RISKAVOIDANCERiskavoidanceismosttimesmisinterpretedasriskacceptance.Onthecontrary,itisanapproachofriskmanagementthatrefusestoacceptarisk.Whentheriskexposureisnotpermittedtocomeintoexistence,orthecausativeofalossistotallyeliminated-thenthisisanavoidancetechnique.Itissimplyavoidingtheactivitythatleadstoaloss;itistheapproachofnotengaginginanactionthatgivesrisetorisk.Thistechniqueisusuallynotthebestforfinancialinstitutionsasitdeprivesthemoftheprofitsandopportunitiesofdoingbusiness;soitisthemostextremedecisiontobetakenwhentherisklevelofdoingbusinessisalsoextreme.Certainriskmanagementscholarsdonotviewavoidanceasariskmanagementtoolsinceitdoesnotentailcontrolofanunwantedeventbutratheravoidthecompromisingeventsentirely.Opposingscholarsseeitasatoolbydistinguishingriskavoidancefromriskignorance.Intheirview,riskavoidancebecomesanoptionwhentheextentofriskofabusinessisknown.Forexample,duringtheassessmentofaclient’screditworthiness,thecreditanalystwouldhaveobservedsomehigh-riskconcernslike-lowlevelofturnover,highcreditexposureoftheclienttootherinstitutions,lowcreditscoreandinadequatedocumentations.Thisconcernsraiseshighlevelriskofdefaultandthebestoptionopenedtoafirmistoavoidthisbusinessratherthanemployinganothertoolwhichmightbecostlytothefirm.Anotherexamplecanarisewhenabankplanstoexpanditsproducttoaccommodateacertainclassoftheeconomy.Aftercompletingthebusinessplanandproposition,thebankdeterminesthattheplanisriskyanddecidesnottopursuethisstrategy/product.Theyhavestrategicallyavoidedtheactivity,sothelossdoesnotarise.Riskavoidanceisalosscontroltechniqueandmosttimessavesthefirmfromemployinglossfinancingtools.Thistechniquemightnottotallyswayyoufromabusinessopportunitybutsuggestabetterapproachortimingforabusiness.Riskavoidanceistheleastexpensivecontroltoolifitturnsouttobethebestdecisionanditcouldalsobethemostexpensiveiftheoutcomediffers.Financialinstitutionsemployacombinationoftechniquestomanagetheirriskandchoosingstrategiesthatbestsuitstheirlineofbusiness.Whicheverthedecisiontakenfromtimetotime,itisimperativetobeintentionalaboutthisandkeepingalog(register)ofthesedecisionsforreferencetoguidefuturedecisions.ProfessionalAdvice-“Alltransactionsarenotcompulsorilyapproved.Adecline(riskavoidance)mightbeyourbestbet”CEOTatoniConsultantToday’sChallenge:Whenthereisrisk,thereisgain.Doesriskavoidancehinderabusinessmorethanithelpsthesurvivalofabusiness?©TimothyAkinyomi¦timothyakinyomi@gmail.com1MorefromTimothyakinyomiFollowLovepodcastsoraudiobooks?Learnonthegowithournewapp.TryKnowableMorefromMediumInheritedMoneyAttitudes —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