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Risk Domain Types
Risk encompasses multiple areas of a business enterprise and therefore to manage it requires a multi dimensional framework and tools.
We see this manifestation in the "4T" principal for handling risk by Tolerating, Terminating, Treating and finally Transferring. Each one of these actions pertain to a certain existential state and the policy action suitable for that state. That can be further classified as LILL for low impact and low likelihood, LIHL for low impact and high likelihood, HILL for high impact and low likelihood and HIHL for high impact and high likelihood.
In the case of LILL there can be acceptance for tolerance as it is manageable due to the minimal impact and also simply careful monitoring is adequate it doesn’t escalate beyond a manageable level. In case of a more serious situation or an impact the action of managing risk could be simply a termination.
This means either selling an asset, reshuffling the balance sheet or closing a position in the trading book, as it deems to create a much bigger consequence that the company can afford to bear. a risk. This action is employed when the risk is too serious and potential for returns are outweighed by the volatility or draw down of that underlying asset or position.
As a risk manager we can simply opt out for treating risk as opposed to terminating it as it is manageable to mitigate risk in this state. Risk mitigation would imply taking proactive steps to reduce or control its impact and likelihood. Lastly the case of transferring risk is to either outsource risk or shift the risk to another party. A simple and most used example would be of buying insurance to transfer a key component of risk burden to a third party
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