Risk Management – Benefits and Costs

Exposures to accidental loss, both actual and potential, impose costs on particular organizations and can have an effect on the entire economy. These costs fall into three broad categories:

  1. property, income, lives, and other things of value damaged or destroyed in accidents;
  2. the deterrence effects of potential accidental losses (the net benefits that could have been gained from activities no one undertook because they were judged to “risky”), and
  3. the resources devoted to managing accidental losses (resources that could have been put to alternative uses had there been no possibility of any accidental losses, no loss exposures).

For an individual organization and for the entire economy, the third category of costs represents the “cost of risk management“.  The reduction in either of the first two categories of costs makes up the “benefits of risk management.”

For an organization as for an economy, a proper risk management program minimizes the total of all three categories of these costs.  Not only does the individual organization reap the benefits of a Risk Management program, but that benefit reaches out to other organizations.

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