Three Methods Of Managing Risk In Business Risk Management

Whether it is investing, driving or just walking down the street, everyone exposes himself or herself to risk. Risk is present when future events occur with measurable probability whereas uncertainty exists when the likelihood of future events is indefinite. Expected loss and variability around the expected loss are two common terms that we normally use to describe risk. Although there are consequences associated with it, a rational person will only take the risk if the benefits exceed the cost. In a business risk management, shareholder diversification results in reduction of risk as it potentially substitutes for corporate risk management and insurance. Diversification is somewhat similar to what insurer will do as both of them pool investments

Comparatively, pure risks can be large relative to business resources and has minimal opportunity for gain to the enterprise. However, the main problem nowadays is the liquidity risk, which is a risk that a firm will not have sufficient cash to cover its current financial obligations and will become insolvent, especially when credit is not available. Besides, there is also a risk ultimately borne by shareholders which is the risk associated with the values of assets and liabilities where the value of capital is the difference between assets and liability. Loss control, loss financing and internal risk reduction are three methods of managing risks. There are numerous techniques by which risk exposures may be controlled. For instance, risk prevention technique concentrate on reducing the frequency of losses while risk reduction technique is associated with reducing the severity of a loss when it occurs. Besides that, hold harmless and indemnity agreement are also one of the effective methods to transfer risk between two parties. The hold harmless agreement occurs when the indemnitor agrees to hold the indemnitee harmless from tort liability arising out of the indemnitor’s negligent act or