Risk Management

Risk management mitigates the adverse effects of risk factors in our lives. Risk negatively affects the productivity of workers in an organization, cost effectiveness of products, quality of services, profitability, and earnings. 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 from 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 include natural calamities, legal causes, physical injury, accidents, fires or even death.

In addition, we also have financial risk management. With the identification of more kinds of risk, the definition of risk management 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 discomforts by using the available resources.

Implementation of Risk Management

Risk Management follows a priority-based policy. That means risks with a high probability of occurrence are given higher 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 due to factors such as:

• Identification problems: Identification problems in risk management can give rise to situations where a risk having a 100% occurrence probability is ignored due to an inability to identify it. 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 risk management that give rise to process engagement risks.
• Difficulty in allocating resources: Resources are limited and can be put to alternative uses. Risk management tries to optimize resources by minimizing expenditures while maximizing the gains.

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 measurable through probability measurement techniques.