Types of Risk Management
Commercial enterprises apply various forms of risk management procedures to handle different risks because they face a variety of risks while carrying out their business operations. Effective handling of risk ensures the successful growth of an organization.
Various types of risk management can be categorized as follows:
- Operational Risk Management: At the primary level, operational risk management deals with technical failures and human errors like:
- Mistakes in execution
- System failures
- Policy violations
- Legal infringements
- Rule breaches
- Indirect and direct additional risk taking
- Financial Risk Management: The process of financial risk management can be defined as minimizing exposure of a firm to market risk and credit risk using various financial instruments. Financial risk managers also deal with other risks related to foreign exchange, liquidity, inflation, non-payment of clients and increased rate of interest.
- Market Risk Management: Deals with different types of market risks, such as interest rate risk, equity risk, commodity risk, and currency risk.
- Credit Risk Management: Deals with the risk related to the probability of nonpayment from the debtors.
- Quantitative Risk Management: In quantitative risk management, an effort is carried out to numerically ascertain the possibilities of the different adverse financial circumstances to handle the degree of loss that might occur from those circumstances.
- Commodity Risk Management: Handles different types of commodity risks, such as price risk, political risk, quantity risk and cost risk.
- Bank Risk Management: Deals with the handling of different types of risks faced by the banks, for example, market risk, credit risk, liquidity risk, legal risk, operational risk and reputational risk.
- Non-profit Risk Management: This is a process where risk management companies offer risk management services on a non-profit seeking basis.
- Currency Risk Management: Deals with changes in currency prices.
- Enterprise Risk Management: Handles the risks faced by enterprises in accomplishing their goals.
- Project Risk Management: Deals with particular risks associated with the undertaking of a project.
- Integrated Risk Management: Integrated risk management refers to integrating risk data into the strategic decision making of a company and taking decisions, which take into account the set risk tolerance degrees of a department. In other words, it is the supervision of market, credit, and liquidity risk at the same time or on a simultaneous basis.
- Technology Risk Management: It is the process of managing the risks associated with implementation of new technology.
- Software Risk Management: Deals with different types of risks associated with implementation of new softwares.