When dealing with risk management techniques many companies and organizations use these to prevent loss and increase profit. The three major risk management techniques that corporations and organizations use in order to manage risk factors are loss control, loss financing, and internal risk reduction. By using these three methods and knowing how they work a business can take to protect the company, the possible risks are easier to be contained and managed. Loss Control Loss Financing Loss financing is one of these techniques and is a “method used to obtain funds to pay for or offset losses that occur” (Risk Management Methods).
Loss financing covers four different areas that help to achieve its end goal; retention and self-insurance, insurance, hedging, and other contractual risk transfers. Retention is when the business or an individual takes responsibility to pay back losses that have occurred. Chase bank holds many accounts and if a risk they took fails, this bank could pay back part or all of the finances individuals lost by investing with this company. Insurance is the second form of loss financing and takes place when funds are paid towards a specific loss and in return the buyers risk is reduced. The third form of loss financing is hedging.
There are several different methods used in order to manage risks which are grouped into financial derivatives. These financial derivatives “may be used to offset losses that can occur from changes in interest rates, commodity prices, foreign exchange rates, and the like” (Risk Management Methods). This form of risk management is primarily used by larger corporations while other contractual risk transfers are used by small businesses as well as large organizations. The contractual risk transfers allow a business to take a risk and then transfer that risk to another organization or party.
An example of a contractual risk transfer is when someone signs a contract with a company to do some work, if a risk occurs, the contract usually states that the original company is not at fault and therefore do not have to pay for the losses that have occurred. Loss financing is a very important part of doing business successfully and making sure that when risks occur that they are managed properly and the finances of that organization do not take a direct hit due to this issue. Internal Risk Reduction Risk Management Methods. Risk and Its Management. The McGraw? Hill Companies. 2004