Risk Control
Meaning
Once the sources of the risk has been
identified, next step should be taken to
control the risk
Risk control means techniques or measures
taken to avoid, eliminate or reducing the
chances of loss – producing event occurring
or limiting the severity of losses that do
happen
Example
Infrastructure risk - reduced – process of
regular inspections
Equipment failure risk – reduced – regular
maintenance according to predefined schedule
Risk due to Fire – reduced – testing fire
detectors every six months
Credit risk facility – reduced – making proper
enquiry about customer creditworthiness
Information security risk – reduced – by
sending msg to client each time when their
bank account accessed
Human error in financial reporting – reduced –
changing into computerized format
Financial reporting frauds – reduced – regular audit
Data loss risk – reduced – regular back ups
Safety risks in work area - reduced – framing
policies and monitoring it
Customer service failure risk – reduced – giving soft
skills training for employee
Poor reviews about new product – reduced – double
quality check
Methods followed to control
risk
Risk avoidance
Risk reduction
Risk financing
1. Risk retention
2. Risk transfer
I. Risk Avoidance
Avoidance takes place when decisions are
made that prevent a risk from even coming
into existence
Personal advancement of individual or
growth of economy requires risk taking
If avoidance used extensively, firm may not
be able to achieve it primary objectives
Example
1. Business firm take a decision not to
manufacture a dangerous products
2. One can avoid the risk of death or
disability in a plane crash by refusing to
fly
3. Losses from fire can be completely
avoided by constructing a fire proof
building
II. Risk Reduction
Means minimizing the risk i.e., minimizing
the loss
Reducing the potential severity of those
losses
Some risk cannot be avoided completely,
but great extent risk can be reduced
Example
Accidents increase by speed or drunk driving –
reduced – not driving after drinking alcohol –
reduces probability of accident
Prohibition against smoking in areas where
flammables are present – to reduce – fire accident
To decrease employees injury while handling
machinery – by installing protective devices around
machinery
Fire accident – reduced – installing sprinkler system
Air bags in automobiles which are activated
without human intervention
Keeping first aid kit to reduce severity of injury
III. Risk Financing
Arrangements of funds to meet those
losses that do occur
It consists of two types
1. Risk retention
2. Risk transfer
i. Risk Retention
An individual or business firm retains the
obligations to pay for part or all of the
losses
Types of Risk Retention
Conscious retention
Unconscious retention
Conscious retention
Individual or organization recognized that
risk will incur.
Retention can be done with a formal plan to
fund losses can be paid by the firm
For ex: A transport company may decide to
retain the risk that cash flows will drop due
to increases in price of oil
Unconscious retention
Unconscious retention occur when
individual or organization didn’t recognized
when risk will occur
Example:
1. Even if a person has mediclaim policy, he
can pay for small medical expenses and he
does not need to claim from the insurance
company
ii. Risk Transfer
Transferring the risk of a individual or organization to
other shoulders
THREE FORMS:
Transfer of risk through purchase of insurance
contracts
Risk transfer is the process of hedging, in which an
individual guards against risk of price changes
Risk transfer take the form of contractual
agreements
Examples
1. Fire accident – Fire insurance policy
2. A farmer sells at future contracts, which is
actually a promise to deliver at a fixed
price in future.
3. A tenant may agree under the terms of
lease to pay any loss that arise out of the
use of premises
