What is Risk Management? Step by Step guiding principles to Risk Management
What is risk management?
Generally, risk is a chance of loss, it is a phenomenon that is part of man’s activities which cant be avoided easily, however, man has been looking for the possible approach to assimilate them and carry out their daily business operation. In a beat to solve this problem, the need for risk management becomes the only lasting alternative.
Risk management refers to the practice of identifying potential risks in advance, analyzing them, and taking precautionary steps to minimize the risk from escalating.
Many individuals attach different meanings to what risk management is because each person tends to see it from his own perspectives, experience, and knowledge. Risk management is a bundle of common sense, the identification, measurement, and economic control of risk that threaten the asset and earnings of a business enterprise; the effective reduction of the adverse effects of risk, and the management procedure devised in order to minimize the adverse effects of possible financial losses by individual and organization.
We don’t manage risks so we can have no risk. We manage risks so we know which risks are worth taking and that don’t worth taking, which ones will get us to our desired goal, which ones have enough of a payout to even take them,” said Forrester Research senior analyst Alla Valente, a specialist in governance, risk, and compliance.
To reduce the adverse effects of risk in a business environment, an organization needs to apply resources to reduce, monitor, and control the impact of negative events while maximizing positive events. A consistent, systemic, and integrated approach to risk management can help determine how best to identify, manage and mitigate significant risks.
Risk management prepares and shapes one to remain in a position he could easily discard any challenge that may arise at the cause of his business.
Definitions of risk management
Risk management is the process of minimizing any potential problems that may negatively impact a project’s viability and timetable.
Risk management refers to the practice of identifying potential risks in advance, examining them, and taking precautionary steps to minimize the negative effects of risk.
Risk management involves the identification, analysis, and response to risk factors that form part of the organizational activities.
Risk management has been defined as a bundle of common sense, the identification, measurement, and economic control of risk that threaten the ” assets and earning of a business or enterprise; the process by which any unexpected loss contingency is managed.
management response to risk factors that form part of the business and devise the possible ways to control its escalation.
Risk management also is the activity of reducing the adverse effects of risk and the management procedure devised in other to reduce the adverse effects of possible financial losses by individuals and organizations.
Importance of Risk Management
The following are the major importance of risk management
a. Risk management provides a business w on-making that will definitely enhance business growth.
b. Risk management helps to minimize any potential problems that may negatively impact a project’s timetable
c. It prepares and shapes the business owners to minimize the adverse effects of loss ahead of time.
d. Risk management is an important process because it builds a business with the required tools so that it can adequately identify and deal with potential risks. Once a risk has been identified, it is then easy to mitigate it.
e. Risk management provides an avenue for building a friendly business void of a high rate of loss exposure.
The risk management process
At the broadest level, the focal issue in risk management is on reducing the adverse effects of risks i.e the attended losses arising from risks. Risk management is a system of people, processes, and technology that enables an organization to establish objectives in line with values and risks.
A successful risk assessment program must meet legal, contractual, internal, social, and ethical goals, as well as monitor new technology-related regulations.
By focusing attention on risk and committing the necessary resources to control and mitigate risk, a business will protect itself from uncertainty, reduce costs and increase the likelihood of business continuity and success.
Three important steps of the risk management process are risk identification, risk treatment and measurement, and risk mitigation and monitoring.
Various Ways of Risk Control
Risk control can be viewed in the following ways
a. Risk avoidance
b. Risk reduction
c. Risk-retention
d. Risk transfer
Risk reduction
This method of risk management attempts to reduce the loss, rather than completely eliminate it. While accepting the risk, it stays focused on keeping the loss contained and preventing it from spreading. An example of this in health insurance is preventative care. An organization can minimize losses either by
i. Total prevention i- (done by averting the cause of the loss.)
ii. Protective or quasi protection. that is protecting things or persons exposed to damage or injury.
iii. Minimizing – to limit loss to as small a compass as possible.
iv. Salvaging: to preserve as much as possible the value of the damaged property or the ability of an injured person.
Risk transfer
Risk transfer can be said primarily as transferring the risk to the insurance company by paying a small consideration called a premium. It is the contractual shifting of risk to the third party, such as insurance to cover possible property damage or injury and transfer the risk associated with the property from the owner to the insurance company. For example, a specialist may be able to carry out the job more safely, being more experienced and skilled in that work. Another may likely be on the use of that equipment. Better-improved equipment.
Risk acceptance and retention
Risk-retention is a wider way of handling risk. Risks can be retained either because they are minor or possibly because of ignorance. After all risk sharing, risk transfer, and risk reduction measures have been implemented, some risks will remain since it is virtually impossible to eliminate all risks (except through risk avoidance). This is called residual risk. Risk can be retained because of financial implications.
Risk avoidance
This is the most crucial way of dealing with risks. It is a method that mitigates risk by not participating in activities that may negatively affect the organization. Not making an investment or starting a product line are examples of such activities as they avoid the risk of loss.
Risk Analysis Process
Risk analysis is a qualitative problem-solving approach that uses various tools of assessment to work out and rank risks for the purpose of assessing and resolving them. Here is the risk analysis process:
1. Identify existing risks
Risk identification mainly involves brainstorming. A business gathers its employees together so that they can review all the various sources of risk. The next step is to arrange all the identified risks in order of priority. Because it is not possible to mitigate all existing risks, prioritization ensures that those risks that can affect a business significantly are dealt with more urgently.
2. Assess the risks
In many cases, problem resolution involves identifying the problem and then finding an appropriate solution. However, prior to figuring out how best to handle risks, a business should locate the cause of the risks by asking the question, “What caused such a risk and how could it influence the business?”
3. Develop an appropriate response
Once a business entity is set on assessing likely remedies to mitigate identified risks and prevent their recurrence, it needs to ask the following questions: What measures can be taken to prevent the identified risk from recurring? In addition, what is the best thing to do if it does recur?
4. Develop preventive mechanisms for identified risks
Here, the ideas that were found to be useful in mitigating risks are developed into a number of tasks and then into contingency plans that can be deployed in the future. If risks occur, the plans can be put into action.
Finally,
A risk is a possibility of an unfortunate occurrence. However, risk management helps to minimize any potential problems that may negatively impact a project’s growth.
It is very important to note that in the normal business of life any risk that cannot be avoided, the best approach to handle it is to manage it.
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