What is Risk Management?
Risk management is the process of planning, implementing and monitoring an organization’s activities to maintain enterprise values, manage risks, ensure compliance with applicable rules and regulations, control operational costs and ensure efficient operations. An organization should have a well-defined risk management policy. It should include identification of asset classes to be managed, the identification of risk owners for each class, identification of risk aggregation processes and areas, identification of financial reporting requirements for risks managed by each area or business line. Risk management process should be designed to mitigate risk where possible. The residual risks are monitored by monitoring the standard deviation in quarterly reporting periods. Risk reporting and stress testing should be conducted to evaluate the level of risk in the organization. Risk management process should be designed to mitigate risk where possible. The residual risks should be monitored by monitoring standard deviations in quarterly reporting periods. Risk reporting and stress testing should be conducted to evaluate the level of risk in the organization.
Risk management is a primary component of any business or corporate entity, as it is part of a larger set of activities, which seek to describe, measure, monitor and control the sources of risk to which they may be exposed. It is a statistical term that refers to the statistical analysis and determination of the probability of various types of events. It should be noted that risk management statistics, as used in Information Security, derive from statistics and probability theory. In banking / financial services, risk management incorporates issues such as credit risk, operational risk and market risk within a bank. In the government sector, the role of risk management is often subsumed by Efforts to manage cyber security so there is a need for effective methods for decision making regarding cyber security risks which have been defined by data gathered via a data collection program. In the medical field, risk management encompasses strategies for preventing adverse health outcomes from occurring. The medical field has a number of other terms relating to risk management, such as adverse event rate and patient safety.
Elements of Risk Management
The type of risk management process will depend on the size, complexity and nature of the organization; but there are common elements among these types:
A comprehensive risk management process should include identification and analysis of both internal and external risks. In dealing with internal risks, the process should account for the risk appetite of the organization. The managers should provide a risk budget and identify the limits to be adhered by each department/function, which should be reviewed periodically.
The first step to a comprehensive risk management system is a first-level evaluation of all existing processes to determine what is working well and what could be improved upon. This should start with an assessment of the supporting systems that are being used by employees in their work offsite, such as desktop computers or mobile devices as well as other tools such as email and instant messaging.
The information may not necessarily be used for all types of risk, but it should be accurate enough to form a foundation for analytics and decision making. The data should be clear enough that there is no ambiguity in the process, or that models can be defined from the information. The information should also allow for intelligent interpretability by end users in order to make critical inputs into decision making processes. This will include a clear definition of what type of risk is being measured and how to calculate it.
The next stage in a comprehensive risk management system is to create a baseline model or profile based on past experiences and knowledge of previous incidents, which leads into the creation of analytic models that can forecast future risks based on the current environment. In order to be effective, this process must be able to forecast the risks based on the data inputted during the first stage of risk analysis.
The last step in a comprehensive risk management system is reporting with a clear and cogent definition of what is being measured and how it can be used. The types of reports generated will vary depending on the type and level of exposure for each area. For some businesses that rely more heavily on exposure or exposure based upon more sensitive areas, reporting may include the more critical areas while excluding minor statistics that do not add value to an overall report.
Types of Risks
The risks involved with a project can be classified as either financial, information technology or time-based risks. Financial risks are those risks that have an effect on a company’s ability to pay its liabilities and could cause financial loss.
Time-related risks can be subdivided into domain risks and timing risks. Domain risks include a delay in a specific phase of a project, which could delay the finishing date of the project. Timing risks include a project taking longer than originally planned to complete.
IT risk is related to the technology choices for the solution itself. IT risk can include technical problems within hardware or software, or choosing technologies that are immature with potential future problems; “For example, cloud computing may be risky because it has neither been around for very long nor has it proven its stability yet”. IT risk can also be related to the business process. For example, outsourcing to a third party may weaken security or increase revenue loss through data breaches.
Business process risks are any risks that affect the completion of the project. Natural disasters, fires, floods and other hazards are examples of business process risks. The choice of vendors/consultants must be carefully evaluated in order to mitigate these type of risks.
Types of risk management
Risk identification is a process of identifying a cause of a potential loss to an organization. This process may involve gathering information regarding the sources of the losses, assessing their relative importance, evaluating the likelihood that they will occur and determining the management responses to be applied in response to them. Risk identification may include identifying asset classes that are vulnerable to loss or investigating whether identifiable assets or liabilities are exposed to identified risks.
Risk assessment is performed prior to actioning any specific risk mitigation procedure in order to determine how much impact each strategy will have on individual organization’s business operations.
Financial institutions are required to maintain a risk management process in order to ensure that their financial instruments are well managed. An effective risk management plan includes identifying risks, assessing financial consequences of different scenarios and selecting an appropriate mitigating strategy. Financial institutions make use of various methods to mitigate actual risks, protect against possible risks and control other types of eventualities. Risk management strategies are based on risk measurement techniques that provide quantitative data that will contribute in mitigating risks.
Risk Management among other things also provides guidelines for the selection of investment options, better capital requirements for investment funds, credit enhancement measures, credit research activities etc. It ensures that businesses are well managed against all types of risks in order to maintain their creditworthiness. In a nutshell, Risk assessment is a fulcrum of any successful business as it helps to guard the business against losses while guiding it in the path of sensible investments. Business managers seeking to hire Freelance Risk Management Consultant can look towards Fintalent, The hiring and collaboration platform for tier-1 M&A and Strategy professionals.
