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Risk Management - Not To Be Ignored or Overlooked
Fadhrick Pickaso
The term risk management has become quite popular in today's world. But, what does risk management stand for?
Risk management is a system to manage uncertainty related to a threat in a structured way. This system covers the sequence of human activities starting from risk assessment, developing strategies to manage risks, and to minimize risk taking help of different managerial resources.
Typical strategies used for the management of risk include transferring the risk to another party, avoiding risk, reducing the harmful effect of the risk, and to accept some or all consequences of a particular risk.
Traditional Risk Management usually focuses on risks as an outcome of physical or legal causes. They generally cover natural disasters or fires, accidents, death, law suits and other similar causes. Financial risk management deals with managing risks regarding different traded financial instruments.
The main objective of risk management is to reduce different risks involved in a specific area to a level which is generally accepted by society.
There are different steps involved in Risk management. A brief description of each step is given below.
The first step is to identify the risk factors involved in the process being studied for risk management. Risk is involved with events, which when started, may create problems. Therefore, the activity of risk identification could start with the source of the problem, or with the problem itself. This step could be divided into two parts: a) finding the source of the risk and b) analysis of the problems that may arise because of these identified risk factors.
The next step is the assessment of risk involved. Once, the potential risk factors have been identified, the potential severity of loss and the probability of its occurrence is assessed for each of these risk factors.
After the risk factors have been identified and their risk potential has been assessed, then the plan to mitigate the negative effect of each risk factor is to be drawn out. Such mitigation plan could be divided into four major categories:
a) Avoidance
b) Reduction
c) Transference
d) Retention
Avoidance would also include not performing an activity which is quite risky. By avoiding the risky activities may sometimes lead to losing out on potential gains. Reduction would include methods that would reduce the severity of loss or the likelihood of loss from occurring. Insurance could be considered as a method of transferring the risk to another party. In case of small risks with minimum impact, retention would be much cheaper than the cost involved for getting insured for such risks.
Management of risk is very important, whether it is for a person or for any organization. Nobody could ignore or overlook it.
Article submitted Friday, September 19, 2008
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