Risk management mitigates the adverse effects of risk factors in our life. Risk negatively affects the productivity of workers in an organization, cost effectiveness of products, quality of service, profitability, earnings and the like. Risk management gives us a way out.
Definition of Risk Management
Risk Management is essentially a planning strategy. It gives mankind an action plan to minimize the hazards arising out of unforeseen circumstances. Risk recognition, its assessment, strategy development and risk mitigation fall within its purview.
Types of Risk Management
Risk management definitions depend on the types of risk covered. They may range from natural calamities, legal causes, physical injury, accidents, fires or even death. Added to this we also have financial risk management. With the identification of more kinds of risk, risk management definition is also changing.
Objective of Risk Management
Risk essentially refers to a problem faced due to the occurrence of an unforeseen event. The objective of risk management is to minimize the discomforts in using the available resources.
Implementation of Risk Management
Risk Management follows a priority-based policy. It means risks with a high probability of occurrence are given more priority than those with a low probability of occurrence. However, the process of prioritizing between a highly probable risk (with low loss) and one with a low occurrence probability (with high loss value) is quite tricky. The strategies used also include avoidance of risk, reduction of the negative externalities of risk, transfer of risk factor to someone else and in certain cases acceptance of the effects of a risk factor.
Some Difficulties Faced in Implementation of Risk Management Policies
Risk Management implementation faces certain problems on account of some factors like
- Identification problem: Identification problem in risk management can give rise to a situation where a risk having a 100% occurrence probability is ignored due to inability of identification. This comes under the purview of intangible risk management.
- Ineffective coordination: Ineffective coordination in risk management can lead to relationship risk.
- Faulty operational procedure: Faulty operational procedure in the arena of risk management that gives rise to process engagement risk.
- Difficulty in allocating resources: Risk Management implementation faces difficulty in allocating resources. This is due to the concept of opportunity cost. Resources are limited and can be put to alternative uses. So risk management needs to optimize by minimizing expenditure on it while maximizing the gains from it.
Some limitations of Risk Management Policies
- Improper risk assessment and priority assignment lead to resource wastage and resultant mismanagement.
- A careful distinction between risk and uncertainty needs to be made. Risks are after all measurable by probability measurement techniques.