What is Risk Treatment? Considering the Severity and Probability of Occurrence, How Should Risk be Treated?

Risk Treatment: Risk Treatment is the stage of risk management where a bank decides how to deal with an identified risk based on its severity and probability of occurrence.

The Four Scenarios

1. High Severity and Low Probability

High-severity and low-probability risks include events that occur rarely. These types of events are difficult to predict. These events are rare, but the consequences are catastrophic. For example, the global economic downturn in 2008 or Black Monday in 1987.

Risk Treatment: In such cases, the risk is transferred through insurance.

2. Low Severity and High Probability

These types of events occur frequently with minor impact rather than huge costs. These issues occur regularly with minimal harm—for example, software bugs or minor traffic delays.

Risk Treatment: Such risks are treated most efficiently by reducing the probability as much as possible. Transferring these risks is not cost-effective.

3. Low Severity and Low Probability

These types of events rarely occur and have minimal impact on the business. For example: Small office equipment damage.

Risk Treatment: These types of risks are accepted by the organization.

4. High Severity and High Probability

These types of events occur regularly and have a catastrophic impact. For example: Frequent cyber attacks on banks, fraudulent link sharing with customers by hackers, etc.

Risk Treatment: These types of risks should be controlled. If possible, avoid or transfer the risk to another entity.

The Four Risk Treatment Options (4Ts):

1. Transfer: Pass the financial loss to another party through insurance or derivatives.
2. Avoid: Stop the activity that creates the risk.
3. Retain: Accept and absorb the risk internally.
4. Control: Reduce the likelihood or impact through procedures and safeguards.