Accepting Risk
Accepting risk, or risk acceptance, occurs when a business or individual acknowledges that the potential loss from a risk is not great enough to warrant spending money to avoid it. Accepting risk, or risk acceptance, occurs when a business or individual acknowledges that the potential loss from a risk is not great enough to warrant spending money to avoid it. Accepting risk, or risk retention, is a conscious strategy of acknowledging the possibility for small or infrequent risks without taking steps to hedge, insure, or avoid those risks. In addition to accepting risk, there are a few ways to approach and treat risk in risk management. In addition, any potential losses from a risk not covered by insurance or over the insured amount is an example of accepting risk.
What Does Accepting Risk Mean?
Accepting risk, or risk acceptance, occurs when a business or individual acknowledges that the potential loss from a risk is not great enough to warrant spending money to avoid it. Also known as "risk retention," it is an aspect of risk management commonly found in the business or investment fields.
Risk acceptance posits that infrequent and small risks — ones that that do not have the ability to be catastrophic or otherwise too expensive — are worth accepting with the acknowledgement that any problems will be dealt with if and when they arise. Such a trade-off is a valuable tool in the process of prioritization and budgeting.
Accepting Risk Explained
Many businesses use risk management techniques to identify, assess and prioritize risks for the purpose of minimizing, monitoring, and controlling said risks. Most businesses and risk management personnel will find that they have greater and more numerous risks than they can manage, mitigate, or avoid given the resources they are allocated. As such, businesses must find a balance between the potential costs of an issue resulting from a known risk and the expense involved in avoiding or otherwise dealing with it. Types of risks include uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters, and overly aggressive competition.
Accepting risk can be seen as a form of self-insurance. Any and all risks that are not accepted, transferred or avoided are said to be "retained." Most examples of a business accepting a risk involve risks that are relatively small. But sometimes entities may accept a risk that would be so catastrophic that insuring against it is not feasible due to cost. In addition, any potential losses from a risk not covered by insurance or over the insured amount is an example of accepting risk.
Some Alternatives to Accepting Risk
In addition to accepting risk, there are a few ways to approach and treat risk in risk management. They include:
Related terms:
Catastrophe Reinsurance
Catastrophe reinsurance protects catastrophe insurers from financial ruin in the event of a large-scale natural or human-made disaster. read more
Complete Retention
Complete retention is a risk management approach where a company facing risks absorbs potential loss rather than transfer that risk to an insurer. read more
Credit Risk
Credit risk is the possibility of loss due to a borrower's defaulting on a loan or not meeting contractual obligations. read more
Crisis Management
Crisis management is identifying threats to an organization or its stakeholders and responding effectively to those threats. read more
Hedge
A hedge is a type of investment that is intended to reduce the risk of adverse price movements in an asset. read more
Mutual Fund
A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is overseen by a professional money manager. read more
Regret Avoidance
Regret avoidance is a theory of investor behavior that analyzes why investors hold on to, or even add to, poorly-performing investments, even in the face of clear signs that they should sell. read more
Risk Control
Risk control is a technique that utilizes findings from risk assessments within a company to reduce the risk found in these areas. read more
Risk Shifting
Risk shifting is the transfer of risk(s) from one party to another party. read more