The term risk management is used to refer to the identification, the polarization and the analysis of the threats or risks that may affect the capitals and earnings of any particular organization.
This is then followed by the economic and coordinated applications of the resources to minimize, control and monitors the impact of any unforeseen events or to maximize the opportunities’ realization.
Understanding the concept of Risk Management
The term risk management is a process of decision making in which several factors are considered like the social factor, the economic factor, or the political factor. It includes even the engineering factors, associated with relevant risks evaluation in context to a potential hazard so that various other regulatory options can be developed and analyzed and compared so that an optimal regulatory response can be selected out which will act as security or protection against any unforeseen event.
In the process of risk management evaluation of the threat and the possible risks are done by selecting either the alternative regulatory or the non-regulatory response to risk. The whole process of selection will require the considering of legal behavioral and economic factors.
Now, in general, the entire risk management process is nothing but an integrated method of avoiding certain areas or threat or risks, then to develop a plan that is comprehensive and then integrating that plan and furthermore conducting of the ongoing evaluation.
In the process of risk management, the measurement and then the assessment of the risk is done. And finally, strategies are developed which will be most fitted when it comes to managing those risks. Now the whole risks management process may have involvement of taking out the insurance against of the losses or to hedge a loan aging the raising of the interest rates or even the protection of an investment against a fall in the prices of interest.
Also in the process of risk management, decisions are taken on the basis of whether one should accept the exposure or decrease the vulnerabilities either by mitigating the risks or by using several cost-effective controls.
Now there are three steps involved in the process of risk management. These are risk evaluation, emission and exposure control risk monitoring. The risk management process is carried out in a very systematic way so that it helps in getting precise results and help in making the best decisions.
This way by following a proper approach the possibilities of risks are minimized and unfavorable deviations are avoided.
7 Steps in Process of Risk Management
1) Establishing the context
Now, this is the first and foremost step of the risk management process. In this step, the establishment of the context is done. This includes things like planning the remainder of the process. After this many of the scopes involve in this exercise are mapped out which are not necessary.
Then next comes the identifying of the objectives of the stakeholders. On the basis of this, the risks will be evaluated. Then a framework is defined for the entire process and then comes setting up an agenda for both the identifying ad the analyzing of the plan.
2) Identifying the risks or threats
Now once the context is established, the next step of the process in which the risk is managed so that the potential risks can be identified. Risks are those unforeseen events that may cause several problems when they are triggered. Thus the basic approach to starting the identification of risk is to determine the primary source of the problem.
The most basic thing that is required for risk identification is the knowledge about the organization for which the risk management process is being performed. One should know for the fact that what are the types of environment in which the market usually performs and also how it operates in these different environments.
These environments can be social legal, economic, climatic, political, etc. also they should be well aware of the various strengths and the weaknesses of the organization.
Along with that, they should know about the vulnerability that has with the unplanned losses, the process of manufacturing, the system of management and the business mechanism in which it operates. One should be very precise while analyzing risks here; otherwise, it may cause a significant loss for the organization.
In this way, the foundation of risk management is built on the basis of risk identification.
3) Assessment of the risks
Now after the risks are identified, they are assessed on the basis of their potential severity of loss and on the number of times they have occurred which is the probability of occurrence. In this process, guesses are made in the best possible manner.
Now the main difficulty that comes in risk assessment is that there is an unavailability of the statistical information of the rate of occurrence of the risk in all sorts of past incidents. The risk assessment should be able to produce that type of data so that it becomes easy to understand the primary risks.
4) Potential risk treatment
Now after the identification and the assessment of the risk has been done, and then comes the managing of the risks. But before the treatment of the potential risks can be identified, it is more important to determine the type of risk which can come under one of the four categories that are mentioned below-
- Risk transfer- in this the expected party will be transferring the whole or a part of the losses of the risk exposure to a different part at a specified cost. Here the things that are involved in the individual contract are the risks transfers. Also, there are many other techniques by which the transfer of the risk can take place.
- Risk Avoidance- now avoiding the risks or neglecting the circumstances can lead to another type of losses. This may include aspects like not performing a particular activity which could carry certain risks. Now while avoiding risks look quite safe in general, but at times, this may also mean that one is losing on potential gains. So those who choose to not to enter in the business just so that they don’t have to face any risk means that they are also avoiding string chances of earning a lot of profit out of it.
- Risk retention- this implies that those losses which have raised due to the exposure of the risk should be retained. Or they can also be assumed by the organization or the business entity. It is often termed an s a deliberate decision for any entity which has a particular type of characteristics. There are basically two different methods which are used for retention; these are- captive insurance and the second one is self-insurance.
- Risk control- risk control can be done in several ways. One can either avoid the risks or can try to control the losses as much as they can.
5) Creating the plan
Now to create a plan the first thing one needs to do id to decide on the various combination of methods that can be used for every risk individually. Each decision that is made with the objective of risk management should be recorded precisely and with utmost care. Then it should get the approval from the appropriate level of the management board.
A good plan should have security control that is applicable as well as effective. It should contain a schedule for implementation of the plan and the persons who are responsible for the execution of a particular section of the plan. One should make sure that the risk management plan is measured effectively.
6) Implementing the risk management plan
After all of the plans are followed successfully, and then comes the final step which is the implementation of the plan. Now to have protection against those is that have been guessed or predicted, one can purchase insurance policies that will help in mitigating the effect of the risk if they ever happen and will also reduce a lot of financial burden from one’s shoulders.
This way almost all of the risk can be avoided without even making any sacrifice o the goals of the entity or reducing those of others.
7) Review and the evaluation of the plan
Now initially it is seldom seen that the risk management plans are perfect. While the plan is being executed it is always possible to make necessary changes in the plan on the basis of practices, losses, and experiences.
Also, the information that is obtained helps in taking many other decisions so that in future the risk can be dealt in much better ways.
One has to make sure that all of these processes are carried out most accurately to get the best result and then take a decision which will be able to protect them from any risk or threat to the organization or the business entity.