Importance Of Risk Management

The implementation of risk management plans in the industries or corporate affairs is considered based on the potential of risk. The potent is anticipated, and strategies to curb the loss are implemented before it occurs. These strategies can save valuable resources and protect the survival of the firm. A research-based plan to avoid the risk must be developed. It is also advisable to implement risk mitigation techniques to safeguard business operations.

These techniques decrease the liability of the firm and make it more stable. These techniques consequently ensure the employees’ job security; it is important to consider because their livelihood depends on the industry.

Branches Of Risk Management

Every business venture involves risk-taking. How much loss an organization can bear is subject to a debt to equity ratio. Every enterprise aspires to neutralize the risk by transferring or controlling. Let’s understand how various organizations deal with it.

Enterprise Risk Management

The ERM is a planned business strategy to find, analyze, and take preventive measures for any unwanted situation. The ERM is accepted and practiced in industries such as energy, finance, aviation, construction and insurance.

Insurance Risk Management

It is the quantification and chances of occurrence of any mishap, which lead to financial loss to their customers. They decide the premium of insurance based on probability. For example, if a person with the age of 60 years willing to buy life insurance, the premium would be high compared to that of the person with the age of 40.

Educational Risk Management

Here, the first step in risk assessment is ‘identification’ like other organizations. It is quite challenging to know the source of risk because a variety of activities are happening inside the school campus. Nowadays, schools have started recruiting safety coordinators to handle these issues.

Cyber Risk Management

The business operations are moving online these days. The valuable information is stored on the cloud servers for optimization or upgradation, and it necessitates protection from being hacked by competitors. It is suggested to use firewalls and two-factor authentication to safeguard sensitive data.

Property Risk Management

The buildings and infrastructure is prone to damage due to ruthless weather or riots. The cost of repairing is unaffordable in some cases; that is why the strategy of ‘transferring risk’ is applied here. Apart from insurance, an owner must perform regular inspections of the property to avoid huge expenditures on the property’s maintenance.        

Process

The process of risk assessment is lengthy and requires contemplation. An entrepreneur should think from both perspectives, i.e., individual and organization, as a whole, to effectively develop plans to prevent the loss. They should prepare for the worst-case scenario. We have endeavored to explain the procedure of risk management assignment in the simplest way.

• Find The Context

At the time of accepting a new project, the organization’s decision-makers should ask: what can go wrong? What kind of difficulties can we encounter? They have to understand the actions performed to finish the project and find the probable risks. They can also look into the existing technology to find a solution.

• Risk Identification

The next step is identification. It begins with the context of our problem. A risk for us is a benefit for competitors, so they don’t take advantage of the situation and expand their business. The source of the problem could be internal or external, so develop a plan accordingly. The risk includes financial loss, disclosure of confidential information, loss of lives etc.

• Risk Analysis

When a specific kind of risk is identified, then a company finds the probability of occurrence and its impact. The purpose of risk analysis is to understand each instance of risk, and it can affect the company and its growth.

• Risk Assessment

Though we can calculate the chances of occurrence of an event but still the answer is not apt. The risk of occurrence is always, so decisions are made according to the board of directors’ experience and past experience. They prioritize the execution of risk mitigation strategies based on case studies and statistics.

As the statistical data is not available for every case, thus the process becomes more challenging. There is the unavailability of data for difficult situations. Once the decision is made for risk mitigation, the question arises whether to apply a solution or not. This decision is taken considering the magnitude of risk. The magnitude of risk is a product of chances of occurrence (probability) and anticipated loss.

• Risk Mitigation

In this step, the organization’s apex body takes the highest value of risk into consideration and develops a plan, either to avoid the risk or lower the impact. They also look for a way to transfer risk to other entities, i.e., insurance. When none of the solutions can be implemented, they accept it, and the budget is recalculated.

Risk Management – Area Of Application

Every major business venture comes with risk. There is always a probability of shutting down the business due to obsolete technology. A business enterprise must assess risk from every aspect before investing. Let’s discuss the applicability of the subject in various settings.  

Enterprise

In an enterprise, a risk is a possible event that can hamper the enterprise negatively. The risk can also endanger the survival, product/service, capital of the firm. Generally, it falls under the category of liquidity risk, credit risk and market risk. To deal with these risks, a plan is formulated to deal with any contingencies.

Project Management

Each phase of the project involved unique risks. Like, in the beginning, the risks are concerned with research, development and sustainability of the project, which deals with a new dimension of the technology. The board of directors must identify the risk and chart out a plan to deal with it.

Infrastructure Projects

These projects include bridges, tunnels, highways, railways, airports, seaports, power plants, dams, aerospace projects, and defense systems. There is always a question of sustainability in these projects. Take an example of a tunnel, after its construction, what if it gets collapsed? It involves the risk of the lives of people as well as a financial risk. The contractor must ensure the robustness of the projects and have a plan to deal with any occurrence.

Pharmaceutical

The role of pharma companies is development, manufacturing and distribution of drug, biotechnological products and vaccination. With every new development of the product, the company’s prestige and financial assets are at risk. There are chances of death of patients after consuming a new drug. To prevent this situation, a new product is prescribed to volunteers, and its effectiveness is analyzed.

Coal and Petroleum

The mining of coal is carried out in hazardous environments; the chances of fire are always high. This threatens the life of drillers. Moreover, the mines are deep inside the upper crust of the earth, and an earthquake can shatter it. Crude oil is dug offshore there is a probability of ruthless waves of fire accidents an organization protects the lives of workers in case of a catastrophic event.

Natural disaster

A country should be well prepared if it is forecasted of disastrous cyclones, typhoons and rain. In case of an earthquake or volcanic eruption, it is necessary to calculate the cost of repair or reconstruction.