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Risk Mitigation

Updated on January 5, 2024
Article byGayatri Ailani
Reviewed byDheeraj Vaidya, CFA, FRM

Risk Mitigation Meaning

Risk mitigation is the process of reducing risk exposure. It involves lessening risk probability and impact. The mitigation procedures explains the importance of identifying and focusing on the risk elements surrounding the matter under consideration.

Risk Mitigation

Consistent articulation of events driving the risk and entities that will be affected by the damaging event during the risk analysis phase facilitates the development of an appropriate mitigation plan. Furthermore, following mitigation practices in a consistent manner helps companies generate a good profile among their stakeholders.

Key Takeaways

  • Risk mitigation is assessing and reducing potential losses due to risk. The goal is to manage risk through financial instruments and policies that reduce the possibility of loss.
  • The main risk mitigation strategies are identification and acceptance, avoidance, control, transference, and monitoring and reviewing.
  • It also helps mitigate potential losses by preventing accidents from occurring in the first place. 

Risk Mitigation Explained

Risk mitigation is reducing or eliminating potential harm from a particular risk. If a risk is very high, risk mitigation can be difficult and costly, and vice versa. Therefore, it is essential to consider the risks associated with a project before starting it so they can be managed appropriately. Some of these risks may be difficult to predict in advance, requiring careful planning and preparation during construction.

It is difficult to predict every risk to prepare for mitigation practices. Since there are broad categories from which risk can arise, for example, geopolitical risks, climate change, technology disruption, and problems with cybercrime, data protection, and privacy. Moreover, some contemporary corporate techniques have their risks, as we have seen during the epidemic. Therefore the entities need to prepare for this unpredictable and turbulent future. Regulatory bodies worldwide are constantly changing and broadening the scope of their work, tackling issues like data security and privacy as well as money laundering, financial crime, breaching of sanctions, bribery, and corruption.

It is easier to manage the risk that is the most obvious, urgent, and significant than many other possible risks that carry significant uncertainty. Therefore, having resources on hand for emergencies and crucial times is essential. Additionally, regularly updating the risk management approach is crucial for companies.

A well-managed risk management program includes a variety of measures, including planning, implementing, monitoring, and reporting. Understanding risks and their potential impacts can take time and effort for business owners and managers. However, when the management takes steps early in the business cycle, they can reduce the likelihood that something goes wrong later on down the line by identifying potential problems before they become significant issues for their company or product.

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Strategies

Risk mitigation strategies are a way to reduce the risk of an accident or other undesirable situation happening. They can be used in various situations and many ways. However, the general strategies applied are the following:

  • Identification and acceptance: It involves identifying, accepting, understanding, and creating awareness about the possible risks associated with the event or project. 
  • Avoidance: This stage connects the identified risk and opportunities for avoiding such risks. For example, it can involve planning for risk and then taking measures to avoid it. 
  • Control: It involves implementing control techniques to diminish or eliminate the impacts of these risks.
  • Transference: In the transference strategy, the pure risk is contractually transferred from one party to another. 
  • Monitoring and reviewing: It involves regular checking and surveillance to evaluate the level of risk.

Examples

Let us look at the risk mitigation examples to understand the concept better:

Example #1

Insurance: A solution to mitigate the financial burden of a business disruption, loss, or damage to a structure or machinery is to get insurance. Insurance firms present various insurance products offering coverage for a variety of damages.

Example #2

Diversification: Portfolio diversification is an example of a risk mitigation strategy utilized to reduce the risk when investing. Diversification includes combining a wide range of investments into a portfolio. Since investments are not similar, they react differently to movements in the market as a whole. Altogether the method focuses on balancing the risk and reward.

Importance

Some of the points signifying the importance of risk mitigation importance are the following:

  • Risk mitigation is significant because it helps reduce the risk of an adverse event. 
  • It is a proactive approach to managing risk rather than waiting for an adverse event to occur before taking action. 
  • It allows a company to prevent problems from happening in the first place and to continue operating when there are issues. 

Risk Mitigation vs. Risk Avoidance vs. Contingency Planning

  • Risk mitigation is when a company mitigates risks to its business by improving the efficiency of operations and reducing its exposure to risk. It is primarily the process of reducing the likelihood and severity of an adverse event.
  • In contrast, risk avoidance is avoiding risks altogether. For example, a company might decide to hold off on hiring new employees until they are sure that demand for their product has stabilized.
  • Risk mitigation identifies and plans outlines steps to minimize the chances of risk and its impact, while a contingency plan outlines what you would do if it materialized. For example, it involves specific planning for an event, such as an emergency or natural disaster, with a high chance of occurrence and for which an entity should be prepared in advance. 

Frequently Asked Questions (FAQs)

What are the main types of risk mitigation?

Risk mitigation is reducing the likelihood or impact of a risk. It can be achieved through four primary methods:
1. Avoidance: Preventing the occurrence of a risk.
2. Reduction: Reducing the risk by reducing exposure to it.
3. Transferring: Transferring responsibility for managing risks to another party, such as an insurance company.

Why is risk mitigation important?

Risk mitigation strategies are steps taken to minimize the likelihood of an issue occurring. Mitigation strategies are essential to decrease the impact and severity of issues that may occur. In business organizations, mitigation is about managing the risks that are inherent in an organization. It involves identifying the risks and then taking steps to minimize them. Thus, vital to keep the work environment and operations safe. 

What is a risk mitigation plan?

In organizations, a project manager creates a risk management plan to anticipate risks, calculate consequences, and specify actions to risks.

This article has been a guide to Risk Mitigation and its meaning. We explain its strategies, examples, importance vs. risk avoidance, and vs. contingency planning. You may also find some useful articles here:

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