Which strategy is often employed when the forecasted cost of risk is less than potential impacts?

When the forecasted cost of risk is less than potential impacts, the strategy of risk retention is typically employed. This approach involves an organization deciding to accept the risk because the cost associated with mitigating or transferring that risk is higher than the potential impact it may have.

In scenarios where risks are considered manageable and the consequences of a risk event are not catastrophic, organizations may choose to retain the risk. This often implies that they have sufficient resources to cover possible losses that may occur as a result of the risk.

Risk retention can be a strategic decision, reflecting an organization’s confidence in its ability to address potential impacts effectively without incurring additional costs through other strategies such as avoidance, transfer, or reduction. For instance, an organization may find that paying for potential losses out of pocket is more economical than purchasing insurance, especially if the likelihood of the risk materializing is low.

In contrast, avoidance entails completely eliminating exposure to the risk, transfer involves shifting the risk to another party (such as through insurance), and reduction focuses on minimizing the impact or likelihood of the risk. Each of these strategies can be appropriate in different contexts, but when the projections indicate that retaining risk is financially sensible, it becomes the preferred choice.