Risk Reduction

Last Updated: September 15, 2020

Definition - What does Risk Reduction mean?

Risk reduction is one of the four main risk management techniques to be used in conjunction with other techniques to help an individual or organization effectively manage the risk of loss.

Risk reduction refers to the way an insurance company or organization can reduce its financial losses by implementing measures that reduce the financial impacts of potential losses.

Techniques can be things that will prevent certain risks from arising, minimizing the frequency or number of times that risk can actually happen, or even minimizing the damage caused when a loss inevitably does occur.

Some examples of common and effective risk reduction practices include:

  • Installing security systems or alarms to reduce the frequency of crime losses.

  • Installing sprinklers and smoke detectors to reduce the amount of damage a fire loss can cause.

Risk reduction is also sometimes called loss mitigation.

Insuranceopedia explains Risk Reduction

Risk reduction is a risk management technique that involves reducing the financial consequences of a loss. This encompasses a whole range of things including reducing the severity of a loss, reducing its frequency, or making it less likely to occur overall.

There are a number of ways that an insurance company can practice risk reduction. Here are just three of them:

The insurance company may require the owner of a property covered for theft and vandalism to install a better security system. These preventative measures will serve as a warning to would-be criminals and decrease the likelihood of a loss occurring. This lowers the probability of the insurance company having to pay for losses.

If a client is covered for fire, their insurer might also suggest replacing materials that are no longer fireproof or to install sprinklers and smoke detectors on-premises. These steps will not necessarily prevent a fire from starting but will go a long way to reduce the financial loss caused by the fire.

An insurance company may also ask an employer whose business it covers to upgrade the safety standards in their workplace or on their job sites. Safety measures that prevent employees from suffering a serious injury will save the insurer from financial losses incurred through liability coverage.

Insurance companies are highly motivated to encourage and incentivize their customers to implement risk reduction practices because there are high costs associated with handling claims. On top of paying out for property or liability claims, even processing and investigating claims can be an expensive affair.

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