Post 233 –by Gautam Shah
One can avoid, manage or accommodate risks to a limited extent. Beyond these, the effects of risks have to be compensated, replaced or transformed in such a way, that there is a sense of equilibrium. One may not be able ‘to re-establish the lost entity, re-enact the missed event, or resurrect the dead system’, but one may indemnify against such losses.
Indemnity: (origin = Latin indemnitas, from indemnis ‘unhurt, free from loss’) 1 security or protection against a loss, hurt, damage or other financial burden. 2 security against or exemption from legal penalties, liabilities or responsibility for one’s actions. 3 a sum of money paid as compensation, especially by a country defeated in war.
Dorfman 1997 prescribes four way strategies for managing the risks: Tolerate (retain), Treat (mitigate), Terminate (eliminate), Transfer (buy insurance, hedge). Ideal use of these strategies may not be possible as some of them may involve trade-offs that are not acceptable to the organization or person making the risk management decisions. Another source (US Department of Defense) calls this ACAT, for Accept, Control, Avoid, and Transfer.
Risks are managed in three ways:
- Perceive the likely scale of affectation,
- Determine the chances of occurrence,
○ Prioritize risks as per their scale and nature affectation
- Develop strategies
○ to control the effects,
○ to recover the earlier condition, as close as possible
○ to compensate the losses to people and organizations.
○ to replace a high risk situation with low level risk (less severity of affectation or predictable occurrence).
A process of prioritization has many facets. Saving lives is given a higher priority then salvaging goods and equipments. Evacuation of human beings gets greater priority then saving a structure. But many countries feel sacrificing a human life may be unavoidable then surrender to a terrorist hostage situation. Risks with greater probability, higher monetary loss (of replacement), are handled first.
Risk management include equating the cost of controlling the risk versus the cost of compensating the losses. It also includes the evaluating the cost of recovery against the expense for compensation. Justifying the cost of being prepared over a long duration for an event that has low probability.
Risk avoidance is just one important aspect of risk management. It means ‘controlling all detrimental activities’. But all risks cannot be avoided and thereby managed. Some risks are delayed, hastened, diverted, or even embraced. Avoiding risks also means losing out a very high gain potential situation. Many take a ‘calculated plunge’ for a small or rare risk.
For example it is perceived that taking on a client (a new project) translates into larger profit in business. That is not always so, because the bother of dealing with an unusual or odd client could actually mean less or no profit for the organization. Another example would be procuring a non standard (without a full guarantee and warranties) for an acute need.
Risk reduction, It involves methods to reduce the severity of the loss. In buildings this includes fire escapes, controlled use of combustible materials, installation of sprinklers with fire detectors, etc. The cost of such risk reduction systems is checked in terms of what it can save or prevent.
Risk retention, Risk retention means the person or the party bears the loss resulting out of an event. This is a viable strategy for small risks where the cost of insuring and getting compensation would be greater, like in minor illness or injuries. All risks that are not avoided or transferred are presumed to be bourn or retained by the person or party.
Risk transfer, Risks are transferred to another party by contract or by hedging (as in betting). Insurance is one type of risk transfer that uses contracts. Risks are transferred to another party, schedule to other time, shifted to different / separate location. The pace of transfer is often hastened or slowed, and the affectations are concentrated or spread. Risk of injury due to local impact (and so intensive) are spread to a wider area by means such as a helmet, a car air-bag, knee pad, a seat belt, etc. Impact buffers and such stopper mechanisms absorb the impact or divert it.
Some biological systems, pliant compositions and pseudo intelligent entities (e.g. some equipment with fuzzy logic and neural networking), have capacity to self regulate or self organize to accommodate the conditions of change. Such systems are inherently restricted or finite in capacity. Their risk sensing and accommodative functionality are available so long as required energy and other input are available. Designers strive to emulate such systems by integrating the risk handling features (such as: gas and fire detectors, auto sprinklers, auto open-shut opening systems, burglar alarms, earth quake and heavy wind load absorbers, etc.), into their creations.