The 4 Responses

Avoid, mitigate, transfer, or accept

Business Risk AnalysisRisk Response & ContingencyFree preview

⏱️ About 15 min

Northwind Trading faces a supplier-risk exposure of E = $100,000 (probability times impact, from Module 4). It weighs four responses. Avoiding the supplier costs $150,000 and removes the whole exposure, for a net of 100,000 - 150,000 = -$50,000. Mitigating removes 60% of the exposure for $40,000, net = 100,000 x 0.6 - 40,000 = $20,000. Transferring it to an insurer costs a $70,000 premium, net = 100,000 - 70,000 = $30,000. Accepting it costs nothing, net = $0. The largest net benefit is Transfer at $30,000.

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The big idea: For each response, compare its net benefit -- the exposure it removes minus what it costs -- against simply keeping the risk. Avoid removes 100% of exposure E at cost Ca (net E - Ca); mitigate removes a fraction p of E at cost Cm (net E*p - Cm); transfer removes 100% of E for a premium Ct (net E - Ct); accept removes nothing and costs nothing (net 0). Choose the response with the maximum net benefit; when the best is a tie, accept and keep the cash.

🎯 By the end, you'll be able to

Compute each response's net benefit as exposure removed minus its cost.
Compare all four net benefits and pick the maximum.
Explain why accept (net 0) is the baseline a paid response must beat.

📎 Helpful to know first

Completion of Module 4: Expected Value & Decision Trees (exposure = probability times impact).

Four ways to answer a risk

Once a risk is on the register with an exposure E (its expected monetary value, probability times impact), a team has four standard responses. Avoid eliminates the source of the risk entirely. Mitigate reduces the probability or impact (say by a fraction p). Transfer shifts the financial consequence to a third party, such as an insurer. Accept keeps the risk on the register and does nothing. Each response removes some of the exposure at some cost, so the fair comparison is the net benefit -- exposure removed minus what the response costs.

\[ \begin{aligned} \text{Avoid}&:\ E - C_a \\ \text{Mitigate}&:\ E\cdot p - C_m \\ \text{Transfer}&:\ E - C_t \\ \text{Accept}&:\ 0 \end{aligned} \]

Reading the formulas

Avoid and transfer each wipe out the full exposure E, so their net benefit is E minus their cost (Ca for avoid, Ct for the transfer premium). Mitigate removes only a fraction p of E, so its net benefit is E times p minus its cost Cm. Accept removes nothing and costs nothing, so its net benefit is 0 -- the baseline. For Northwind's $100,000 exposure: avoid = 100,000 - 150,000 = -$50,000; mitigate (p = 0.6) = 100,000 x 0.6 - 40,000 = $20,000; transfer = 100,000 - 70,000 = $30,000; accept = $0. The largest is transfer at $30,000, so that is the recommended response.

✨ Accept is the bar to clear

Accepting a risk keeps your cash and keeps the exposure, for a net benefit of exactly zero. A paid response is worth choosing only when its net benefit is positive and larger than every alternative -- including the zero from doing nothing. If every response nets zero or worse, accept.

🎮 The 4 Responses LIVE

Predict first: Predict first: E $100,000, avoid $150,000, mitigate 60% for $40,000, transfer $70,000 -- which response wins?

Slide the exposure and each response cost to watch the four net-benefit bars update, with the winning bar highlighted. Mitigate is fixed at 60%. Illustrative -- hypothetical, for learning only; not indicative of real outcomes.

📝 Worked example: A risk has exposure E = $100,000. Avoid costs $150,000; mitigate removes 60% for $40,000; transfer costs a $70,000 premium; accept is free. Which response has the best net benefit?

1. Avoid net = E - Ca = 100,000 - 150,000 = -$50,000.
2. Mitigate net = E*p - Cm = 100,000 x 0.6 - 40,000 = 60,000 - 40,000 = $20,000.
3. Transfer net = E - Ct = 100,000 - 70,000 = $30,000.
4. Accept net = $0. Maximum is Transfer at $30,000.

✓ Transfer, net benefit $30,000

✏️ Practice: A risk has exposure E = $80,000. Avoid costs $90,000; mitigate removes 50% for $20,000; transfer costs a $55,000 premium; accept is free. What is the best net benefit value?

💡 Hint

Compute each net benefit; the best is the maximum. Accept nets $0.

Solution

1. Avoid net = 80,000 - 90,000 = -$10,000.
2. Mitigate net = 80,000 x 0.5 - 20,000 = 40,000 - 20,000 = $20,000.
3. Transfer net = 80,000 - 55,000 = $25,000.
4. Accept net = $0. Maximum is Transfer at $25,000.

Check your understanding

1. E = $100,000, avoid $150,000, mitigate 60% for $40,000, transfer $70,000, accept free. Which response is best?

Transfer nets 100,000 - 70,000 = $30,000, the largest of the four (mitigate $20,000, accept $0, avoid -$50,000).

2. Why is accept (net $0) worth comparing at all?

Accept keeps the cash and the exposure for a net of zero; a paid response is worth choosing only if it beats that baseline.

✅ Key takeaways

Each response net benefit = exposure removed minus its cost.
Avoid and transfer net E - cost; mitigate nets E*p - cost; accept nets 0.
Pick the maximum net benefit; on a tie, accept and keep the cash.

➡️ Choosing a response leaves some risks accepted or only partly mitigated. Next we sum the retained exposure of those risks into a contingency reserve.

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