Question

Risk avoidance is an appropriate strategy when the potential losses seriously outweigh the likely benefits. What factors should be considered on the cost and benefit sides of the analysis? At what point should a business decide to discontinue an activity rather than try to manage the risk involved? What is one clear example of risk avoidance?

Answer 1

Businesses face many types of risks such as financial risks involving credit risk, liquidity risks,market risks and non financial risks like political and policy instability, outbreak of a disease, etc.

Risks are inherent to a business. In order to mitigate the losses due to risks .. risk management strategies are evolved . Risk management is a systematic approach of 1. Identifying the potential risk, 2. Analysing the risk , 3. Taking precautionary steps to reduce the risk. Risk management is controls or reduces the losses due to risks where as Risk Avoidance completely eliminates the potential risks.

Risk Avoidance is elimination of hazards, activities and exposures that can negatively affect a firm's assets. And risk avoidance is an appropriate strategy when the potential losses seriously outweigh the likely benefits.

Factors to be considered in analysing the risks:

An assessment of the impact of the risk in the organisation should be done. Look into the number of areas or departments which are going to be affected.

Risk remediation - Determine wether the risk is having any remedy, if yes, wether it can be applied on time with minimal damage.
if the risk remediation is not available then asses the cost of the risk to the organisation. This is where you should decide wether to accept the risk and manage it or avoid the risk completely.

Based on the availability of the resources, cost of the risk management task and the criticality of the task a business should decide wether to face the risk or avoid it entirely.

If the risk management and remediation task is draining the organisation's resources heavily and it is affecting the performance of the firm negatively beyond recovery then the management should decide to discontinue the activity rather than managing the risk involved.

One clear example of risk avoidance we have seeing in the current times is all the business entities have shut down their operations during the COVID-19 pandemic to avoid any risk of contracting the virus as it is potentially fatal and causes great human losses.