What Is Risk Control

Risk control means that risk managers take various measures and methods to eliminate or reduce the possibility of risk events, or reduce risk Loss caused by the event.

Risk control methods

The four basic methods of risk control are: risk avoidance loss Control, risk transfer and risk retain 。

1. Risk avoidance

Risk avoidance means that the investor consciously gives up the risk behavior and completely avoids the specific loss risk. Simple risk avoidance is the most negative way to deal with risks, because investors often give up the potential target income while giving up risk behavior. Therefore, this method is generally adopted only in the following cases:

(1) Investors are extremely risk averse.

(2) There are other schemes that can achieve the same goal, and their risks are lower.

(3) The investor is unable to eliminate or transfer risks.

(4) The investor is unable to bear the risk, or the risk cannot be adequately compensated.

2. Loss control

Loss control is not to abandon risk, but to make plans and take measures to reduce the possibility of loss or reduce actual loss. The stage of control includes three stages: before, during and after the event. The purpose of ex ante control is mainly to reduce the probability of loss, and the purpose of in-process and ex post control is to reduce the actual loss.

3. Risk transfer

Risk transfer refers to the act of transferring the risk of the transferor to the transferee through the contract. Sometimes the risk degree of economic entities can be greatly reduced through the risk transfer process. The main forms of risk transfer are contracts and insurance.

(1) Contract transfer. By signing a contract, some or all risks can be transferred to one or more other participants.

(2) Insurance transfer. Insurance is the most widely used way of risk transfer.

4. Risk retention

Risk retention, that is, risk taking. In other words, if the loss occurs, the economic entity will pay with any funds available at that time. Risk retention includes unplanned retention and planned self insurance.

(1) No plan for retention. It means that the risk loss is paid from the income after it occurs, that is, the financial arrangement is not made before the loss. When the economic entity is not aware of the risk and believes that the loss will not occur, or the maximum possible loss related to the risk that will be realized is significantly underestimated, it will adopt the unplanned reservation method to bear the risk. Generally speaking, no capital reserve should be used with caution, because if the actual total loss is far greater than the expected loss, it will cause difficulties in capital turnover.

(2) Planned self insurance. It refers to making various financial arrangements to ensure that funds can be obtained in time to compensate for possible losses before they occur. The planned self insurance is mainly realized by establishing a risk reserve fund.