Risk Management Approach - Process of Risk Management| The IRM India

A common misconception about risk management is that the goal of risk management is to completely eliminate risk from the organization. This is not the case in practice, since it is practically impossible to exclude risks. In practice, this is not the case as the risks cannot be practically eliminated.

Approaches to Risk Management

The approaches commonly followed in the risk management process have been detailed below: 

Risk Avoidance: 

The simplest strategy is called risk prevention. In this approach, the company avoids taking risks as much as possible. However, this strategy is not viable for many companies. In fact, most businesses carry some degree of risk. Thus, if the company is simply trying to avoid risk, it should significantly reduce the scope of its activities. The end result of this approach is that there is little incentive for activity to occur. 

Diversification: 

Diversification is one of the oldest and most fundamental strategies of risk management. With this approach, the company consciously tries to engage in very different business activities. Because the activities are so different from each other, adverse economic events generally do not occur simultaneously. 

Risk Transfer:  

Another way to manage risk is to transfer it to outside parties. There are many outside parties, such as insurance companies, willing to take the risk for a fee. However, there is no insurance for all risks. 

Risk Retention: 

Risk retention is a strategy by which a company decides to keep risk on its books. This policy may be due to a high conversion cost. Or it may be because the company has too much confidence in its internal controls. Companies with good operational risk management processes tend to retain risk.  

Importantly, the same risk can be addressed in different ways, depending on the company's standard policies. It is important to create policies based on the different approaches above. 

Benefits of Risk Management - Risk Management Process

 Risk management is a significant cost for any business. To effectively mitigate the risks inherent in your business, you need to hire and retain qualified professionals. The cost can be significant. This expense is often a deterrent to small businesses that don't implement risk management. However, large companies realize that the value generated by risk management activities far outweighs the costs. 

Various Benefits provided by Risk Management 

Forecasts Probable Issues

One of the benefits of risk management is that it changes the culture of a business organization. Companies that are more willing to manage risk are more proactive than others that can be responsive. Risk management allows companies to take a closer look at each business process and decide what could go wrong. This detailed what-if analysis helps companies be more proactive and anticipate potential issues. 

Prevention of adverse events 

Risk management prepares companies for all kinds of shocks. Risk managers try to anticipate small failures that affect the day-to-day operations of any business. However, they also try to focus on adverse events, such an event is highly unlikely. 

Enables Growth

When it comes to launching a new product or entering a new market, companies have a ready-made framework that they can deploy to avoid these risks. So in a sense, risk management allows companies to take calculated risks and accelerate their growth. Thanks to comprehensive risk management process, the company has a lot of data at its disposal. This data can be mined to gain meaningful insights that ultimately lead to better decision making. 

Business Process Improvement

The routine risk management process requires companies to gather more information about their processes and activities. This enables companies to identify inefficiencies in processes and areas for improvement. 

Enables Better Budgeting

Firms with risk management procedures have better control over their finances than other firms. In fact, they often keep a close eye on their financial statements and try to reduce any waste. The main thing is that these companies know their processes better. It also makes these companies more aware of their budgets. 

Rookie Guide for Risk Management - Risk Management Process | The IRM India

 Risk management is the process of reducing or mitigating risk. It begins with the identification and assessment of risks, followed by the use of the best resources to analyze and reduce them. 

Risk generally arises from uncertainty. In an organization, this risk can arise due to market uncertainties (supply, demand, stock market), project failures, accidents, natural disasters, etc. Depending on the type of risk, there are different tools to deal with the same thing. 

Following this cycle, there are four stages in the risk management process. The first step is risk identification, followed by assessment and management. 

Risk Management Process

There are several organizations that provide principles and guidelines for risk management processes. The steps involved remain essentially the same. There are small differences that go into the cycle of different types of risks. 

Project management risks, for example, are different from financial risks. This explains some developments in the whole risk management process. However, ISO has specified specific steps for the process and is almost universally applicable to almost all types of exposure. Policies can be implemented throughout the life of any organization and across a wide range of activities, including strategies and decisions, operations, processes, tasks, projects, products, services and resources. 

According to ISO 31000 (Risk Management – ​​​​​​Principles and Guidelines for Implementation), the risk management process includes the following steps:

Establishing the Context :

Establishing a context means identifying all potential risks and thoroughly analyzing potential impacts. Different strategies are discussed and decisions are made for risk identification process.

Identification: 

Once the context has been successfully established, the next step is to identify potential threats or risks. This identification can be done at the source level or at the problem itself. Source analysis consists of analyzing the source of a risk and taking the appropriate mitigating measures. This source of risk can be inside or outside the system. 

Assessment: 

Once risks are identified, they are evaluated based on their likelihood of occurrence and impact. This process can be as simple as assessing tangible risks and as difficult as assessing intangible risks. This rating is more or less a guessing game and determines the academic best estimate of the plan's success. 

The industry practice or formula for arriving upon the risk is: Frequency of occurring × Impact