Risk Management Tools
There are various tools used in risk management:
Risk Avoidance: to avoid a risk completely – an extreme example will be to own a car but never drive it to avoid the risk of being involved in an accident.
Risk Reduction: or loss prevention will include all measures taken to reduce the possibility and/or the severity of the risk. As an example installing a tracking system will reduce the risk of your car being stolen. Driving responsibly will reduce the risk of being involved in an accident.
Risk Transfer: Taking out insurance will be transferring the risk which a person or business is not prepared to carry by themselves. It is the process whereby a party exposed to a possible loss, damage or liability, such as a car owner, transfers these risks to another party, namely the insurer or insurance company. As the insurer now carries the risk he can transfer the risk, or part thereof to a reinsurer.
Businesses will use Risk Monitoring systems to obtain feedback on any losses, analyse the losses and its extent and also to review the effectiveness of the risk management processes. The term Risk Financing is used to describe the steps taken to ensure that sufficient funds are available to deal with a loss.