Risk management defined

In the extremely volatile financial environment of today, risk management focuses on matters of insurance and is concerned with identifying potential risks, which may have a severe impact on a firm. Firms conduct risk management assessments in an effort to identify new ways of protecting their assets against sharp market fluctuations.

Originally, risk management was related to the acquisition of the proper insurance, which was offered in standardized forms, basically eliminating the need of risk management. Insurance was purchased to cover the cost incurred by fire, theft and liability losses. Over time, globalization and the increased volatility of financial markets has given birth to a great variety of risks, which can adversely affect organizations. This changed the concept of risk management radically, making it increasingly important.

Modern organizations use risk management as a common practice, particularly for any operation, which is related to financial or facilities management. However, risk management is not focused only on financial risks, but on a multitude of risks that may pose potential threats for a firm. In particular, some of the risks, which need to be alleviated or managed by risk management, are:

Generally, liability, property, personnel and environmental risks are insurable risks, meaning they can be covered by insurance. However, in order to decide if a specific risk will be insured, managers need to evaluate all optimal alternatives. This is a major function of risk management, which facilitates the undertaking of optimal risk measures.

Organizations recurrently undertake a comprehensive assessment of potential risks, at least twice a year. The assessment is being performed by a corporate team comprising of staff members representing all the major functions of the organization.

A complete risk management assessment involves the following stages:

(a)    Identifying the risks

At this stage, risk managers identify the potential risks that may be a threat to the firm. It is important to understand, that risks should not be categorized only by how the industry insurance views them. Each firm performs different activities and undertakes different types of risk. On the other hand, insurance coverage includes a tiny set of risks that modern firms face. Therefore, risk managers should apply a holistic view of risk management to pursue effectively their business objectives. Such a holistic view encompasses risks, which are related to:

(b)   Measuring the potential effect of each risk

There are risks that are tiny and are not really posing any threat to the organization, while others may greatly impact organizational viability. Risk managers should be able to segregate risks by measuring their potential effect and then focus on the most serious threats.

(c)    Deciding on the appropriate handling of each risk

In most situations, risk exposure is anticipated and reduced by the use of several techniques. These involve, but are not limited to the following:

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