Risk treatment is the next phase in the risk management process, where organizations decide on actions to address identified risks. It involves selecting one or more options to modify the risk to an acceptable level. Additionally, the implementation of controls—specific actions or mechanisms to manage these risks—is a fundamental aspect of effective risk treatment. This article explores the four primary risk treatment options and the types of controls that can be applied: preventive, detective, and corrective.
Four Risk Treatment Options
Risk Avoidance: Risk avoidance involves deciding not to engage in activities that generate risk. For example, an organization may choose not to enter a new market or develop a new product if the potential risks are deemed too high relative to the expected returns. This is the most conservative approach to risk treatment.
Risk Mitigation: Risk mitigation strategies aim to lessen the likelihood and/or impact of a risk. This involves implementing controls that minimize the potential for risk occurrence or mitigate its effects should it occur. An example of risk reduction could be adding safety features to machinery to prevent accidents.
Risk Transfer: Transferring risk involves shifting the responsibility or burden of risk to another party, typically through outsourcing or insurance. For instance, companies often purchase insurance to transfer the financial risk of theft or damage to their assets.
Risk Acceptance: Sometimes, the cost of mitigating a risk may outweigh the benefits gained from eliminating it. In such cases, an organization may decide to accept the risk. This decision is usually made when the risk is low and within the organization’s risk appetite. Risk acceptance often involves setting aside reserves or taking no action other than periodic monitoring of the risk.
What is a Control?
In risk management, a control is a measure or mechanism that modifies risk. Controls are designed to prevent, detect, and correct issues that may affect the achievement of an organization's objectives. Effective controls help organizations ensure operational efficiency, and compliance with laws and regulations.
Types of Controls
There are different types of controls. It is important to understand the different effects they have to ensure the selected controls have the desired effect.
Preventive Controls
Preventive controls are designed to deter unwanted events before they occur and mitigate vulnerabilities to prevent them from being exploited. They are proactive measures that help avoid potential negative outcomes.
Examples include:
Passwords and authentication systems to prevent unauthorized access.
Employee training to avoid errors and violations.
Surveillance cameras and guardsmen to deter intruders.
Detective Controls
Detective controls are implemented to identify and detect occurrences of a risk event. These controls are essential for identifying issues promptly so that corrective actions can be taken. Examples include:
Audits and reviews that catch discrepancies.
Surveillance cameras that detect unauthorized access or activities.
Network monitoring tools that detect security breaches.
Corrective Controls
Corrective controls are measures taken to restore systems or processes back to their normal state after a risk event has occurred. These controls help mitigate the impact of an event and prevent future occurrences. Examples include:
Disaster recovery plans that restore IT services after a cyber-attack.
Revising failed procedures or systems.
Disciplinary actions to correct employee behaviors.
Conclusion
Risk treatment is a vital component of risk management, enabling organizations to handle risks strategically. By understanding and applying the four risk treatment options—avoidance, mitigation, transfer, and acceptance—along with implementing appropriate preventive, detective, and corrective controls, organizations can safeguard their interests and enhance their resilience against adverse outcomes. Effective risk treatment not only protects but also contributes to the strategic and operational stability of an organization.