Risk management is the process of identifying and controlling any potential threats to an organisation’s assets, resources and capital. It includes forecasting potential risks like financial uncertainties, strategic mangement errors, legal liabilities, accidents and natural disasters, and making certain provisions to manage them.
The elements of risk management are stated below:
Businesses operate in a dynamic and ever-changing environment which is laden with different kinds of risks that ultimately result in financial losses. Thus, identifying a potential loss is imperative. We need to identify and understand the risk thoroughly before we can move forward and decide how to deal with it. A risk manager specialises in detecting risk exposure areas. His job includes devising and implementing appropriate techniques to identify the risks.
In order to understand how to control the expected losses, we need to evaluate the potential risks. The risk manager should have a clear understanding of the risk- how badly it can affect the business. He should understand its impact on the business and its probable frequency of occurrence. The evaluation is done using both the qualitative and quantitative methods. Qualitative evaluation is based on past experiences of the risk manager. He evaluates the possible effects of specific events on the enterprise. On the other hand, quantitative evaluation works on accuracy. It produces a more developed risk model with accurate projections, depending on the quality of the input data. At times, these two methods are used together in order to produce a fairly comprehensive risk analysis.
Risk control includes two aspects- loss prevention and loss reduction. A risk manager cannot completely prevent a loss in a given area, but a sound risk management can decrease the frequency of loss in that area. It also includes taking measures that reduce the cost and severity of the losses. Decreasing the frequency of losses and reducing their severity once they occur are the two major goals of risk control. Another way of preventing loss is by eliminating the risks.
Certain steps can be taken to prevent the occurrence of risks. These include:
- Risk avoidance: A risk can be avoided by changing the location, procedure or equipment or by giving up an activity that gives rise to risk in a business.
- Risk reduction: Risk can always be reduced by taking certain steps like installing security devices, inspections, security patrol, and keeping a check on the employee.
- Risk retention: It includes building up a contingency fund to finance the loss incurred. This is the financial risk control aspect. A sound risk management ensures the identification of risks and creating appropriate financial reserves for dealing with the expected or incurred loss.
After identifying and evaluating the risk, you need to minimise the loss in a proper manner. For that, the manager must cover the risk with insurance or with a combination of both insurance and risk retention methods.
Thus, when a business makes an investment decision, it exposes itself to a number of financial risks. In order to minimise and control the exposure of businesses investments to such risks, fund managers and investors practice risk management. If you are eyeing to shape your career in the field of risk management, then you should pursue MIT-SDE’s 18-months Post Graduate Diploma in Risk Management. The course material is industry-specific and it is updated regularly, making it suitable for the present business landscape that is evolving rapidly.