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Risk Management
Risk Management is the process of measuring, or assessing risk and
developing strategies to manage it. Strategies include transferring the
risk to another party, avoiding the risk, reducing the negative effect
of the risk, and accepting some or all of the consequences of a
particular risk. Traditional risk management focuses on risks stemming
from physical or legal causes.
Financial risk management, on the
other hand, focuses on risks that can be managed using traded financial
instruments. Regardless of the type of risk management, all large
corporations have risk management teams and small groups and
corporations practice informal, if not formal, risk management.
An
ideal risk management starts with establishing the context, inclusive
of the identity and objectives of stakeholders, the basis upon which
risks will be evaluated and defining a framework for the process, and
agenda for identification and analysis. The next step in the process is
to identify potential risks-events that, when triggered, cause problems.
Hence, risk identification can start with the source of
problems, or with the problem itself. Once identified, they must then be
assessed as to their potential severity of loss and to the probability
of occurrence. After which, a decision on the combination of methods to
be used for each risk shall be made. Each risk management decision
should be recorded and approved by the appropriate level of management.
In
as much as no initial risk management plans will be perfect practice,
experience, and actual loss results will necessitate changes in the plan
and contribute information to allow possible different decisions to be
made in dealing with the risks being faced. In the end, risk analysis
results and management plans should be reviewed, evaluated, and updated
periodically.
Risk management also faces difficulties in
allocating resources. This is the idea of opportunity cost. Resources
spent on risk management could have been spent on more profitable
activities. Again, ideal risk management minimizes spending while
maximizing the reduction of the negative effects of risks.
If
risks are improperly assessed and prioritized, time can be wasted in
dealing with risk of losses that are not likely to occur. Spending too
much time assessing and managing unlikely risks can divert resources
that could be used more profitably. Unlikely events do occur but if the
risk is unlikely enough to occur it may be better to simply retain the
risk and deal with the result if the loss does in fact occur.
Prioritizing
too highly the risk management processes could keep an organization
from ever completing a project or even getting started. This is
especially true if other work is suspended until the risk management
process is considered complete.
Risk management is simply a practice
of systematically diagnosing, quantifying severity, selecting cost
effective approaches for minimizing the effect of threat realization of
the risks to the organization. All risks can never be fully avoided or
mitigated simply because of financial and practical limitations.
Therefore all organizations have to accept some level of residual risks.
About the Author:
Aweng recommends Risk Management
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supply readers with the inside track on trends and events in risk
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