This post focuses on the last risk management strategy, which we have introduced throughout the last weeks. Take a look at the lasts posts to get the full overview!
The final and most debated goal of risk management strategies is according to Senior Disaster Management Specialist, Damon P. Coppola, risk transfer, sharing or spreading. The concept of the goal is not actually to reduce the risk, but to dilute its consequence or likelihood across a large group of people such that each suffers an average consequence. Risk transfer involves moving the risk to another third party or entity, even though this may include giving up some control. By outsourcing, moving to an insurance agency, or leasing property, your organization is not responsible all alone when something goes wrong.
The most common form of risk transfer is insurance, which includes reinsurance. Insurance reduces the financial consequence of a hazard’s risk by eliminating the monetary loss associated with property damage. Insurers charge a calculated payment that is priced according to the hazard’s expected frequency and consequence. Payment of the premium guarantees the repayment of losses to impacted participants if the insured hazard occurs. In this way the cost of the secondary hazards is thereby shared by, or spread across, all participants through the payment of premiums. The risk transfer safeguards the project team against unpredictable risks such as weather, political unrests, or COVID-19, which are outside of the project team’s control.
OBS: Risk management may seem superfluous at the beginning of the project. When a project manager is beginning a new project, it is indeed difficult to consider what could go wrong, especially if the project team is overconfidence biased (as described in our earlier post). Therefore, risk management must be considered an absolute priority from the beginning of the project!
Risk transfer do not always result in lower costs. Instead, a risk transfer is the best strategy when you can reduce future damage. In this way insurance can cost money, but it may end up being more cost-effective, than having the risk occur and being solely responsible for reparations.
Risk sharing includes sharing the risk impacts or liability among suppliers, partners, contractors, or companies by a contract. This sharing enables them to reduce risks around capacity and to reduce the risk of price fluctuations. For instance, if a power supply fails in an expensive server causing the loss of revenue for a customer, you could ask and receive a replacement power supply.
Summary of risk management strategies
Avoid, accept, transfer, consequence, or likelihood reduction. For each risk you encounter, you and your organization will have to deal with it. A pre assessment or risk analysis enable more options than just a major construction recall.
Within your organization’s risk management framework, you should be aware of the different strategies along with understanding the guidelines for their implementation. Engineers and managers make decisions concerning risks every day, throughout the organization. Providing a set of clear strategies along with guidance allows the entire organization to appropriately mitigate risks daily.
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Coppola, D. (2015): “Introduction to international disaster management”