Risk Avoidance
What Does Risk Avoidance Mean?
Risk avoidance is a risk management approach focused on completely eliminating risk rather than merely reducing it. Instead of mitigating existing risks, this strategy seeks to remove the source of the risk entirely, sometimes replacing it with a smaller, more manageable risk.
Risk avoidance often involves eliminating hazards or activities that could increase the likelihood of losses or claims. For example, an organization may choose not to pursue a particular operation or may shut down an existing one due to the associated risks. If outdated equipment in a workplace poses risks to workers, a risk management strategy might involve implementing safe work procedures and providing protective gear.
In contrast, a risk avoidance strategy would address the issue by removing the outdated equipment and replacing it with safer alternatives. Risk avoidance is one of several strategies that can be integrated into a comprehensive risk management plan to safeguard an organization’s assets, which may include equipment, employees, clients, or other critical components of the business.
Insuranceopedia Explains Risk Avoidance
In the context of business growth, the risk avoidance strategy is not always the best option.
Risk avoidance occurs when an organization refuses to accept a risk, preventing it from materializing. This is achieved by simply refraining from engaging in actions that could lead to risk. Here are a few scenarios where a business might encounter risk avoidance:
Everyday examples include:
- Avoiding the risk of losing savings in a hazardous venture by opting for one with less risk.
- Avoiding the risks associated with property ownership by choosing to lease or rent instead of purchasing property.
- Discovering that a particular product is hazardous and deciding not to manufacture or sell it.
These examples illustrate negative rather than positive risk management techniques. For businesses, this approach is sometimes unsatisfactory for handling various risks. If risk avoidance were applied too extensively, a business might miss out on many profitable opportunities and likely fail to achieve its objectives.
For example, a soap manufacturer could choose to eliminate harmful chemicals like parabens and replace them with safer, organic alternatives to protect workers and consumers. However, this could result in insufficient funding to produce the new soap.
This risk avoidance approach would likely harm the business, preventing it from even getting off the ground. Risks must be managed and balanced, as avoiding them entirely is often impractical.
