Risk management

        Why is risk management important?

Risk management is the process of identifying, assessing, and prioritizing potential risks or uncertainties that could impact an organization's objectives, and then taking appropriate measures to minimize or mitigate those risks.

The process of risk management involves several steps, including:

Risk Identification: This involves identifying potential risks or uncertainties that may affect an organization's goals, objectives, or operations. These risks could be related to a variety of factors such as financial, operational, regulatory, legal, reputational, or environmental risks.

Risk Assessment: Once potential risks have been identified, they must be assessed to determine their likelihood of occurrence, their potential impact on the organization, and the level of risk tolerance that the organization is willing to accept.

Risk Mitigation: This involves taking steps to reduce or eliminate the risks identified in the assessment stage. This could include implementing controls, developing contingency plans, or transferring the risk to another party through insurance or other means.

Risk Monitoring: Risk management is an ongoing process, and risks must be monitored and reassessed regularly to ensure that the organization is prepared to respond to any changes or new risks that may arise.

The ultimate goal of risk management is to help an organization achieve its objectives while minimizing the potential impact of uncertainties or risks. By identifying potential risks and taking appropriate measures to mitigate them, organizations can reduce the likelihood of negative events and improve their overall resilience and ability to adapt to changing circumstances.

The risk management process

At the broadest level, 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 analysis and assessment, and risk mitigation and monitoring.

Identifying risks

Risk identification is the process of identifying and assessing threats to an organization, its operations and its workforce. For example, risk identification may include assessing IT security threats such as malware and ransomware, accidents, natural disasters and other potentially harmful events that could disrupt business operations.

Risk analysis and assessment

Risk analysis involves establishing the probability that a risk event might occur and the potential outcome of each event. Risk evaluation compares the magnitude of each risk and ranks them according to prominence and consequence.

Risk mitigation and monitoring

Risk mitigation refers to the process of planning and developing methods and options to reduce threats to project objectives. A project team might implement risk mitigation strategies to identify, monitor and evaluate risks and consequences inherent to completing a specific project, such as new product creation. Risk mitigation also includes the actions put into place to deal with issues and effects of those issues regarding a project.

Risk management is a nonstop process that adapts and changes over time. Repeating and continually monitoring the processes can help assure maximum coverage of known and unknown risks.

Risk response strategies and treatment

There are five commonly accepted strategies for addressing risk. The process begins with an initial consideration of risk avoidance then proceeds to three additional avenues of addressing risk (transfer, spreading and reduction). Ideally, these three avenues are employed in concert with one another as part of a comprehensive strategy. Some residual risk may remain.

What are the most common responses to risk? 

Risk avoidance

Avoidance is a method for mitigating 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 reduction

This method of risk management attempts to minimize 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.

Risk sharing

When risks are shared, the possibility of loss is transferred from the individual to the group. A corporation is a good example of risk sharing — a number of investors pool their capital and each only bears a portion of the risk that the enterprise may fail.

Transferring risk

Contractually transferring a risk to a third-party, such as, insurance to cover possible property damage or injury shifts the risks associated with the property from the owner to the insurance company.

Risk acceptance and retention

After all risk sharing, risk transfer and risk reduction measures have been implemented, some risk will remain since it is virtually impossible to eliminate all risk (except through risk avoidance). This is called residual risk.

Limitations and risk management standards

Risk management standards set out a specific set of strategic processes that start with the objectives of an organization and intend to identify risks and promote the mitigation of risks through best practice. Standards are often designed by agencies who are working together to promote common goals, to help to ensure high-quality risk management processes. For example, the ISO 31 000 standard on risk management is an international standard that provides principles and guidelines for effective risk management.

Transferring risk

While adopting a risk management standard has its advantages, it is not without challenges. The new standard might not easily fit into what you are doing already, so you could have to introduce new ways of working. And the standards might need customizing to your industry or business. 

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