Risk Mitigation

Question 1

What Risk Mitigation Techniques are there?

Answer 1

1. Risk Sharing – the costs or consequences of risk is distributed among several stakeholders across the org/industry
2. Risk Acceptance – once a risk has been examined and assessed, a firm may decide to accept the risk and retain it
3. Risk Retention – accepting the loss or gain from a risk when it occurs. This may be because the cost of mitigating the risk is greater than the losses that could be incurred
4. Risk Avoidance – withdrawing from a business or deciding not to take on new business because the level of risk is unacceptable
5. Risk Transfer – e.g. taking on insurance. This transfers the risk to another party
6. Risk Reduction

Question 2

How may one Control risks once they’ve been identified and measured?

Answer 2

1. Preventative Controls – prevent errors from occurring such as
   
   • IT and systems controls
   • Segregation of duties
   • Maintenance of data integrity
2. Detective Controls – detect errors once they have occurred such as
   
   • Internal detection controls – inspection and checking activities
   • External detection controls- detect errors and losses after they have been realised e.g. reconciliations
3. Risk Reduction Strategies – reduce losses if a risk crystallises
   
   • Diversification strategies
   • Risk sharing
   • Financial reserves
   • Insurance
   • Contingency planning

Question 3

What should Contingency Planning Activities include?

Answer 3

• Good communication and reporting – if a risk is realised, a firm can react quickly to reduce the impact
• Limit Setting – market and credit risk limits can be the first sign of operational errors. Capital limits can also be set on projects
• Outsourcing – arrangements should be based on robust contract to clearly allocate responsibilities
• Risk awareness training – risk framework should provide employees with additional guidance for when the firm is under stress. Training needs to be reviewed on a regular basis.

Question 4

What criterion needs to be met for a risk to be insurable?

Answer 4

• Premium covers the claims and insurers expenses
• The nature of the loss must be definite and financially measurable
• The loss should be random in nature

Question 5

Why might a risk be uninsurable?

Answer 5

• Probability and cost of risk cannot be calculated
• The risk is too widespread e.g. war
• When loss is incurred due to deliberate actions
• Examples include obsolete technology and changes in price levels