(RMI) Risky Business Lesson

Risky Business

Before we begin talking specifically about business risk, let's be clear about what risk is and what we can do about it. There is risk in any situation that exposes us to danger. Risk has three components: 1) an event that causes harm; 2) an undesirable outcome; and 3) a probability of the event occurring. Once we have identified a risk we have four choices: ignore it, avoid it, reduce it, or transfer it. Risk management means identifying the risk then choosing how to deal with it.

You transfer risk through insurance. A policyholder pays a premium to the insurer to protect them from financial loss should the thing they are insured against occur. Even with insurance, the insured has a responsibility to take steps to avoid and reduce risk. In addition, not all risks are insurable. For a risk to be insurable it must cause sufficient financial hardship that an individual or company would be willing to pay a premium for the coverage, but the loss cannot be so huge that the insurance company could not afford to pay for it (think act of war!) A risk would be uninsurable if it were impossible to value, too large and too costly for the insurance company to pay for, too inexpensive to be worth paying premiums for, or inevitable.

Categories of Risk

Starting a business can be very risky. Take a minute and consider all of the things that could go wrong when opening and running a business. Now consider how you would handle each of those risks: ignore it, avoid it, reduce it, or transfer it. In the interactivity below, discover some of the risks faced by a business. As you read the descriptions, think about how each risk should be handled.

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