Discuss the various risk management strategies to handle risk.

The various risk management strategies are:

1. Risk avoidance

2. Risk reduction

3. Risk retention

4. Risk combination

5. Risk transfer

6. Risk sharing

7. Risk hedging.

 Risk avoidance
Risk avoidance is where a certain loss exposure is never acquired or the existing one is totally removed. This is one of the strongest methods to deal with risks. The major advantage of this method is that it reduces the chance of loss to zero. The two ways by which risk can be avoided are proactive avoidance and abandonment avoidance. In the first case, the person does not assume any risk and therefore any project which brings in risk is not taken up. For example a company which has chances of nuclear radiation will not set up the company, due to the perils which it can bring up.
In the case of abandonment avoidance, the existing loss exposure is abandoned. All activities with a certain degree of risk are abandoned. The case of abandonment avoidance is very few. If a firm abandons risky activities, then it faces difficulties in remaining in the market. The firm in the process of abandoning might take up new activities which exposes to another type of risk.

Risk reduction
This strategy aims to decrease the number of losses by reducing the occurrence of loss, which can be done in two ways namely loss prevention and loss control.
Loss prevention is a desirable way of dealing with risks. It eliminates the possibility of loss and hence risk is also removed. The examples of this are safety programs like medical care, security guards, and burglar alarms.
Loss control refers to measures that reduce the severity of a loss after it occurs. For example segregation of exposure units by having warehouses with inventories at different locations. Insurance companies provide guidance and incentives to the company which has taken the policy to avoid the occurrence of loss.

 Risk retention
Retention simply means that the firm retains part or all the losses incurred from a given loss. Risks may be knowingly or unknowingly retained by the organisation. They are hence classified as active and passive based on this. Active risk retention is when the firm knows of the loss exposure and plans to retain it without making any attempt to transfer it or reduce it. Passive retention is the failure to identify the loss exposure and retaining it unknowingly.
Retention can be used only under the following circumstances: 

When insurers are unwilling to write coverage or if the coverage is too expensive. 

If the exposure cannot be insured or transferred.

If the worst possible loss is not serious. When losses are highly predictable.
Based on past experience if most losses fall within the probable range of frequency, they can be budgeted out of the company’s income.

Risk combination
In this strategy, risks are retained in a proportion that reduces the overall risk combination to a minimum level. In order to minimise the overall risk, one risk is added to another existing risk instead of transferring a risk. This strategy is mostly used in management of financial risk. The risk is distributed over a number of issuers instead of putting it on a single issuer. This reduces the chances of default. For example it is better to have multiple suppliers instead of relying on a single supplier.

Risk transfer
If the risk is being borne by another party other than the one who is primarily exposed to risk then it is termed as risk transfer. In this case, transfer of asset does not take place but only the risk involved is transferred. The two parties involved in this strategy are the transferor (party transferring the risk) and the transferee (party to whom the risk is transferred). The contracts made in this strategy are grouped as exculpatory contracts.
In this contract the transferor is not liable if the event of risk takes place. But if the transferor is supposed to pay for the risk incurred then it cannot be termed as risk transfer.
 

Risk sharing
This is an arrangement made by which the loss incurred is shared. For example in a corporation, a large number of people makes investments and hence each bears only a portion of risk that the enterprise faces. Insurance involves the mechanism of risk sharing.

Risk hedging
Hedging is buying and selling future contracts to balance the risk of changing prices in the cash market. A hedger is someone who uses derivatives to reduce risk caused by price movements. Derivatives are instruments derived from the base securities like equity and bonds. Forward contracts, futures, swaps and options are examples of derivatives.