Effective risk management means knowing at any stage:
- What your risks are – Risk Identification
- What they mean in financial terms – Risk Evaluation
- What can be done to eliminate or reduce them – Risk Control
- What financial resources you have to absorb them – Risk Retention
- What Insurance is required for the remaining risks – Risk Financing
Best business practice insofar as the treatment of risk is concerned calls for reduction of any possible loss by way of implementing the appropriate safeguards or by transfer of the risk to third parties wherever possible. The simplest method our transferring risk to third parties is by terms of contract – if you study your existing standard terms of contract you will notice that you are already incorporating this technique into your business methodology.
You will note from the model that the residual risks are only insured once the full risk management process has been achieved -insurance must not be construed in isolation as the only real answer to risk. It is a financial system, which, in itself, is incapable of making good many losses. Human life, lost opportunities for profit and loss of goodwill are but a few examples. Consequently, insurance should only be purchased once all other Risk Management techniques have been adopted.