Introduction to Risk Management

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Risk is a fact of life. It is inherent in all human activities. It is a natural phenomenon that has its uses.But all risk is not bad. It is also related to reward. If one were to take a philosophical view of the subject, it is difficult to imagine life without risk, and it can also be invigorating to the mind, extracting the best out of it.

However, in the context of Risk Management in a business, we are concerned with the negative impact of the phenomenon, and how it can be eliminated or at least minimized.

A business may face risk from various quarters. Basically there are two categories or classes of risk. One, that is by chance, and the other by design. Let us assume that a Company is faced with a certain situation that occurs once in a blue moon. Being unprepared for this situation, the Company loses, say, USD: 10,000.00. However, in order to be prepared for this risk the Company might have had to spend USD: 100,000.00. This risk was purely by chance. On the other hand, many American Banks have gone under the burden of their poor housing mortgages. This is a risk by design. These Banks got themselves into trouble with their eyes open.

Dealing with Risk:

Whatever the category or class of risk, the first step that businesses need to take to deal with it is to set up a mechanism to foresee and forestall it. The second step would be to minimize that part of it that cannot be altogether eliminated. The third step would be to transfer or divert it. And the fourth step would be to accept the remaining part of the risk and try to go with the tide, that is, to endure the risk, and the pain associated with it, and then to bounce back into action.

The following sequence of steps may be taken to deal with Risk in order to get the best results possible. It needs to be borne in mind that there is no single, perfect way of dealing with this necessary evil. Much depends on the nature of the risk, the surrounding circumstances, and the resources available at a particular time to deal with it. But the wisdom of being prepared for the eventuality cannot be disputed.

1) Identification: Look and you shall find! Risk is everywhere. Every activity or even inactivity has certain inherent risks. The idea is to break down every activity into independent components, and identify the risk associated with each and also as a whole.

Identification of risk is part of the ground work in risk management, and the more thorough and efficient the ground work, the better the end result. Every business activity must be studied end to end, and all potential problems, and risks associated with them, must be mapped and dealt with.

2) Elimination: Once the risks are identified, the next step is to naturally eliminate them. Of course, not all risks can be eliminated. Nor all of them need to be endured. To the extent possible, and viable, risks must be eliminated through a combination of strategies, depending upon the context, the nature and the extent of the probable risks faced.

3) Mitigation: Risks that cannot be eliminated must be reduced. The quantum of loss to a business from risk depends upon the severity of the risk. By reducing the severity of such risks, a business can reduce the potential loss on account of it.

4) Acceptance: “What cannot be cured must be endured”. But one can make one’s life safer and more comfortable by accepting the inevitable in a planned way, and channeling the risk within the ecosystem of the organization in such a way as to make the impact of it bearable.

5) Diversion or Transfer of Risk: Another way of dealing with risk is to imaginatively divert or transfer risk to another entity. In other words, one’s risks may be outsourced to others, an example being insurance.

All said and done, risk can be dealt with in many ways, and there is no perfect way of dealing with it, except that being prepared for it can give us a better chance of tackling it.

However, the methods employed to deal with risk must not amount to the cure being worse than the disease.

Source by Muhammed Yasser

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