What is risk acceptance?
Risk acceptance is a risk management strategy in which a business acknowledges and accepts the existence of a particular risk, but does not take action to reduce or eliminate it.
Rooted in the principle that not all risks warrant a response, companies employ risk acceptance, sometimes called risk retention, to absorb infrequent, low-impact risks that pose no threat to business continuity or financial stability.
When is risk acceptance tolerable in business?
Management weighs the cost of a risk mitigation strategy, such as risk transfer, and compares it with the organization's risk appetite, or its comfort level with uncertainty in pursuit of an objective. Risk acceptance is supportable only under specific business conditions, including the following:
- Low probability. The risk is unlikely to occur at all.
- Marginal impact. If the risk manifests, its business impact is low, such as occasional minor equipment failures.
- High mitigation cost. The cost of mitigation outstrips potential financial losses from the risk.
- Healthy risk appetite. A company accepts risks within the organization's tolerance levels.
- Regulatory compliance. Any accepted risk must adhere to regulatory requirements.
Active vs. passive risk acceptance
Risk acceptance has two basic types, active acceptance and passive acceptance.
Passive acceptance
Passive acceptance indicates that an organization is aware of a risk, but has no risk mitigation plan to respond to that risk. For example, an organization understands that some employees leave the company with no notice, but it doesn't have an established human resources strategy to replace them.
Active acceptance
In contrast, active acceptance means that the organization is aware of a risk and has a recognized contingency plan for incident response if that risk rises above a threshold that requires mitigation. For example, an organization acknowledges supply chain vulnerabilities and develops a response playbook in case the risk materializes.
How to assess the severity of a risk
An organization cannot accept a risk without first scrutinizing and understanding its severity. A structured risk assessment determines both the likelihood and potential impact of any risk.
Risk assessment mirrors risk acceptance in many respects. Both strategies identify the risk; determine its probability and impact; apply organizational risk tolerance; and complete a cost-benefit analysis, weighing mitigation against acceptance.
The following checklist outlines the key steps to consider:
| Step | Question | Action | Key considerations |
| 1. Identify risks. | What is the nature of the risk? | Conduct workshops, analyze historical data and interview stakeholders. | Include internal and external threats: financial, operational, compliance and strategic. |
| 2. Evaluate likelihood. | How likely is it to occur? | Assign probability score: Use a 1-5 scale, or "rare" to "almost certain." | Use statistical data, expert opinions or qualitative assessments. |
| 3. Assess impact. | What is the impact if it occurs? | Determine financial, operational and reputational consequences. | Either quantify losses, such as "three days of downtime," or use severity scales, such as "negligible" to "catastrophic." |
| 4. Prioritize risks. | Is the combination within acceptable limits? | Plot risks on a matrix: likelihood × severity. | Use color coding: red for high, yellow for medium and green for low. |
| 5. Cost analysis. | What is the cost of mitigation vs. potential loss? | Calculate expected monetary value: probability × cost impact. | Compare mitigation costs to potential losses: $500,000 upgrade vs. $50,000 breach. |
| 6. Regulatory check. | Are there mandates requiring action? | Review alignment with permits, laws such as GDPR and OSHA, and industry standards. | Flag noncompliance fines, reporting obligations or operational restrictions. |
| 7. Reassess periodically. | When was the last time the risk was assessed? | Review quarterly, biannually or after major organizational changes. | Update likelihood and impact scores based on new data or mitigations. |
Examples of acceptable risks
Acceptable risks manifest across operational, strategic and financial aspects of any business. Some practical examples of acceptable risks include the following:
- Delivery delays. A company tolerates the operational risk of minor delivery delays during peak season due to unpredictable traffic.
- Minor equipment failures. The failure of a minor piece of equipment, such as a computer mouse, is an acceptable risk since it's easier to replace than to fix.
- Noncritical employee turnovers. Some organizations accept the risk of employee turnover in non-key positions because replacements typically are available.
- Construction delays. A contractor accepts a potential schedule overrun from weather delays rather than investing in all-weather construction enclosures.
- Beta product launches. From a strategic perspective, technology companies launch beta products -- despite the real risk of usability flaws -- to reach the market before competitors.
Alternative strategies to risk acceptance
There are other risk management options for organizations to consider when risk acceptance isn't tolerable, including the following:
- Risk avoidance. Avoid risks in the first place. Risk avoidance focuses on eliminating hazards, activities and exposures that negatively affect an organization.
- Risk mitigation. Risk mitigation takes steps to reduce the negative effects of threats and disasters on business continuity.
- Risk transfer. Shifting financial risk and liabilities to another party through formal agreements is a common alternative. A business transfers potential burdens through insurance, contracts or other financial instruments.
- Risk sharing. The risk responsibility is shared among multiple participants.
