Introduction and Definition
Risk management is the process of measuring, or assessing risk and then developing strategies to manage the risk. In general, the strategies employed include transferring the risk to another party, avoiding the risk, reducing the negative affect of the risk, and accepting some or all of the consequences of a particular risk. Risk management is essential for many endeavors like statistics, economics, psychology, social sciences, biology, engineering, toxicology, systems analysis, operations research, and decision theory.
Areas of risk management:
1. Traditional Risk Management: Traditional risk management focuses on the risks originating from physical and legal causes.
2. Financial Risk Management: It includes the use of traded financial instruments to manage or avoid potential risk. This focuses on how and when should the financial instruments be used to manage costly exposures to risk.
3. Intangible Risk Management: It includes risks associated with Knowledge (deficient knowledge), relationships (ineffective collaborations) and engagement process (ineffective operations). These risks reduce the productivity. Intangible risk management identifies a new type of risk – a risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identification ability.
Risk management includes prioritizing of risks, which include greater risk and greater probability of occurrence.
Process Of Risk Management
The process of risk management essentially follows 5 steps, They are:
1. Designing of framework under which the risks have to be evaluated. And reasons for which the analysis and identification of risk should be undertaken.
2. Identification of potential risks: This includes the identification of source of risk and problems associated with that risk. It also involves the risk identification based on predefined objectives.
3. Analysis of Risk: This includes the analysis of severity and probability of occurrence of the unforeseen risk.
Here the risk is sometimes calculated as follows
Risk = Rate of occurrence X Impact of event.
4. Risk Evaluation: This step is important as evaluation of risk in financial / monetary terms is imperative to be able to present the effect of risk numerically.
5. Treatment of risk: Once the risk is identified and properly assessed and evaluated it treatment of risk becomes important for future. Techniques of treating the risk majorly fall under following categories:
Â· Transferring the risk to another party
Â· Avoiding the risk
Â· Reducing the negative affect of the risk
Â· Accepting some or all of the consequences of a particular risk
Difficulty in Risk Management:
1. Resource Allocation: This includes the opportunity cost analysis i.e. the resources that are assigned for the purpose of risk management could be used for other and more profitable activities. But ideal risk management includes engaging least amount of resources for the purpose of risk assessment and still reducing the negative effect of risk as much as possible.
2. Difficulty in assessment and prioritization of risk: This process is time consuming so it involves the possibility of wastage of time and resources in dealing with risk.
Because of the above-mentioned problems with the risk management it becomes necessary to clearly define the difference between the Risk and Uncertainty.
Hence we can conclude that even if the Risk management have few loopholes it is important for the smooth running of the organization or business.
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