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CH07 Introduction To Risk Management

Risk management is a systematic process to identify, analyze, and mitigate risks that could negatively impact an organization. It involves establishing the context, identifying and analyzing risks, evaluating them, treating risks, monitoring risks, and communicating about risks. The goal is to prioritize resources towards reducing risks that pose the greatest threat to the organization's objectives and operations. Risk management helps protect shareholder value, ensure legal and regulatory compliance, and enhance strategic decision making.

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45 views20 pages

CH07 Introduction To Risk Management

Risk management is a systematic process to identify, analyze, and mitigate risks that could negatively impact an organization. It involves establishing the context, identifying and analyzing risks, evaluating them, treating risks, monitoring risks, and communicating about risks. The goal is to prioritize resources towards reducing risks that pose the greatest threat to the organization's objectives and operations. Risk management helps protect shareholder value, ensure legal and regulatory compliance, and enhance strategic decision making.

Uploaded by

Francis Ryan Porquez
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction to Risk Management

Definition of Risk
• Risk means “the possibility that something unpleasant or unwelcome
will happen”.
• A risk is an uncertain event which may occur in the future.
• The word ‘risk’ derives from the early Italian “risicare”, which means ‘to
dare’.
• In this sense, risk is a choice rather than a fate. The actions we dare to
take, which depend on how free we are to make choices, are what the
story of risk is all about.
• Note that not all risk is bad, some level of risk must be taken in order to
progress / prevent stagnation.
Definition of Risk
• Risk is defined in financial terms as the chance that an outcome or
investment's actual gains will differ from an expected outcome or
return.
• Risk includes the possibility of losing some or all of an original
investment.
• A risk may prevent or delay the achievement of an organization’s or
units objectives or goals.
• ‘Risk’ is dynamic and subject to constant change.
• A risk is not certain – Its likelihood can only be estimated.
Classification of Risks
Internal Risks External Risks
 Human Risks  Competition and Market Risks
 Equipment and Information  Business Environment Risks
Technology Risks
 Other Internal Risks
Human Risks
Death Theft and fraud
 Owner  Product and inventory theft
 Employee  Time sheet fraud
 Accounting and cash fraud

Illness Low morale, dissatisfaction


 Short term  Failure to perform
 Long term  Sabotage of systems,
 Indefinite equipment or customers
Equipment and Information Technology Risks
Equipment breakdowns Information technology
 New equipment integration downtime
 Worn older equipment  Lack of backup or recovery
 Damage to vehicles system
 Updates and repairs
 Power and connectivity (physical
damage and outdated systems)
 Lack of administrative controls
Other Internal Risks
Physical plant repairs Cash flow changes
 Breaks in lines or utilities  Unexpected costs
 Routine maintenance  Loss of credit lines
 Expenses to establish lines of
Incidents credit
 Work related injuries
 Damage to others’ property by
employees
 Damage to your property by
others
External Risks
Competition and Market Risks Business Environment Risks
 Loss of clients or customers  Laws
 Loss of employees  Weather
 Decrease in sales  Natural Disaster
prices/fluctuating markets  Community
 Increases in vendor costs
 Oil or gasoline price increases
 Fixed cost changes (e.g., rent)
Risk Appetite
• Risk appetite is the amount of risk an individual or organization is
willing to take on.
• This tends to be situational. For example, an individual may be
comfortable taking health risks but extremelyadverse to financial
risk.
• Likewise, an organization may take on one type of risk and be
adverse to another type of risk.
Types of Risk Appetite
Risk-seeker
• This refers to an attraction to risk.
• This includes individuals who are comfortable with high risk but are only
willing to take calculated risks that are rational.
• For example, an investor who buys stocks that are equally likely to go up 2x
or fall 49% within a month.

Risk-neutral
• Comfort with risk that is taken for a good reason such as risks that are taken
rationally based on an analysis of risk-reward.
• For example, an individual who makes a risky career choice who knows it
may be a difficult path is willing to face this risk to reach a goal they feel is
important.
Types of Risk Appetite
Risk adverse
• A tendency to prefer the safest choices in every list of options.
• In some cases, efforts to avoid risk can create larger secondary risks.
• The classic example of this is an investor who avoids all risk who fails to
preserve the value of their wealth due to inflation.
What is Risk Management?
• Risk Management is the name given to a logical and systematic
method of identifying, analysing, treating and monitoring the risks
involved in any activity or process.
• Risk Management is a methodology that helps managers make
best use of their available resources
• Risk Management practices are widely used in public and the
private sectors, covering a wide range of activities or operations.
These include: Finance and Investment, Insurance, Health Care,
Public Institutions and Governments
Risk Management

• It is a process to:
– Identify all relevant risks
– Assess / rank those risks
– Address the risks in order of priority
– Monitor risks & report on their management
Risk Management – why do we need it?
• Identifying areas of threat to the business
• Assessing the potential impacts and managing these
• Growth and continued existence of the business
• Promotes good management
• May be a legal requirement depending upon industry or sector
• Resources available are limited – therefore a focused response to
Risk Management is needed
How is Risk Management used?
• The Risk Management process steps are a generic guide for any
organisation, regardless of the type of business, activity or function.
• There are 7 steps in the RM process. The basic process steps are:
1. Establish the context
2. Identify the risks
3. Analyse the risks
4. Evaluate the risks
5. Treat the risks
6. Monitoring and review
7. Communication & consultation
Risk Management Process
1. Establish the context
 The strategic and organisational context in which risk
management will take place.
 For example, the nature of your business, the risks inherent in
your business and your priorities.

2. Identify the risks


 Defining types of risk, for instance, ‘Strategic’ risks to the goals
and objectives of the organisation.
Identifying the stakeholders, (i.e.,who is involved or affected).
Past events, future developments.
• Risk Identification – what are the threats and uncertainties
associated with my organization’s or units objectives?
– Separate out the risk into its cause & possible effect
– Be concise & clear
– Do not concentrate on symptoms only
Risk Management Process
3. Analyse the risks
 How likely is the risk event to happen? (Probability and
frequency?)
 What would be the impact, cost or consequences of that event
occurring? (Economic, political, social?)

4. Evaluate the risks


 Rank the risks according to management priorities, by risk
category and rated by likelihood and possible cost or
consequence.
 Determine inherent levels of risk.
Risk Management Process
5. Treat the risks
 Develop and implement a plan with specific counter-measures to
address the identified risks.
 Consider:
Priorities (Strategic and operational)
Resources (human, financial and technical)
Risk acceptance, (i.e., low risks)
 Document your risk management plan and describe the reasons
behind selecting the risk and for the treatment chosen.
 Record allocated responsibilities, monitoring or evaluation
processes, and assumptions on residual risk.
Risk Management Process
6. Monitor and review
 In identifying, prioritising and treating risks, organisations make
assumptions and decisions based on situations that are subject to
change, (e.g., the business environment, trading patterns, or
government policies).
 Risk Management policies and decisions must be regularly
reviewed.
 Risk Managers must monitor activities and processes to
determine the accuracy of planning assumptions and the
effectiveness of the measures taken to treat the risk.
 Methods can include data evaluation, audit, compliance
measurement.

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