Five Principles of Risk Management

Introduction

Risk management is a compulsory part of all the major organizations. It plays a vital role from assessment to finalization a project. Various principles apply risk management by the international standardization organization and by the project management body of knowledge. The principles that play a core role in driving a decision and prioritizing the risks are embedded deep into the mind of the risk manager’s brains. These, combined with the other bits of knowledge, the basic principles for risk assessment can be reinforcing and engaging. The day to day work routine of organizational leaders and other high ranking members and staff is so busy that they don’t know about the basic principles of risk management. The discussion of risk and principles that are necessary for the management can be constructive in demonstrating how a robust risk management plan can support the organization in achieving its goals and objectives. The essay will discuss five basic principles of risk management and its implementation in order to execute the plans effectively. The principles that will be addressed in the essay are risk identification, risk analysis, risk appetite, addressing risks and reporting. These principles are applied to almost the situations related to business or personal lives as well.

Five Principles of Risk Management

Risk Identification

Risk identification is the most fundamental principle for risk management process. The principle is precisely what it sounds like. Risk identification means the risks that are presented to the organization according to the present scenario. For example, everyday riding or driving a car. The person might identify the risks due to the poor maintained of the car or the lack of fuel in the task. There is a risk present of a financial loss if there is no liability insurance in place. In terms of organizations, the risk managers need to know about the risks it faces and evaluates them. The first step in building an organization’s risk profile in risk identification. There are more than one ways to document an organization’s risk profile.

The risk identification can be separated into two phases

Initial Risk Identification

The initial risk assessment is for organizations that have not identified the risks previously in a structured manner. This is necessary for a new organization or for a new project or activity within an organization.

Continuous Risk Identification

Continuous risk identification is necessary for the identification of new risks that were not previously present or identified already. The changes in certain factors can introduce new risks, so the continuous risk assessment must be made a regular routine.

In both phases, the risks are very closely related to the objectives. Risks can be assessed and prioritized only when they are related to the goals. The identification of risks should be made with great care because it will meet the business objectives but might not be apparent on an immediate basis about the particular business objective. After a risk is identified, it may be related to more than one of the goals of the organization. The possible way of addressing the risk may be different as per different situations.

Risk Analysis

The risk analysis is the second most important principle of risk management. There is three essential principles of risk analysis.

• Make sure that there is a clear, structured process that analyzes the impact and likelihood for each of the risks.
• Make a record of the risk assessment in a manner that makes the monitoring and identification of risk priorities very easy.
• It clearly explains the difference between inherent and residual risks.

The risk analysis lends itself to a number of diagnoses, especially the risk in the form of finances. This reputational factor is another element that is a part of risk analysis. The total sense of risk assessment can be considered more of an art than science. The evaluation should be based on unbiased and independent evidence, the analysis must consider the perspectives of all the stakeholders that might be affected by the risk. The maximum effort should be made during the assessment not to confuse the analysis with the acceptability of risk. The assessment of the risk needs to be done, keeping in mind the likelihood of the risk being realized and the impact it will have if the risk is realized. The risk assessment can be sort in three categories like high, medium and low.

When the risk assessment is analyzed with respect to risk control, the extent of the action that is required to manage the risk becomes very clear. The absolute value of the risk assessment is not essential, but whether the risk can be classified is tolerable or not. At the organizational level, the risk analysis can become very complicated, but the level of a specific threat is more acceptable if the level of exposure that is acceptable can be defined in terms of sustainable impact and the tolerable frequency of the risk impact.

Risk Appetite

Risk control offers various opportunities like risk avoidance, risk prevention and risk reduction. While the risks are considered the concept of risk control embraces the level of exposure that would be regarded as tolerable and acceptable in case the risk is realized. In this sense, the comparison of the cost of controlling the risk with the price for the risk exposure and becoming a reality can be used to find the perfect balance and control. When considering the opportunities, the concept tackles with the idea of how much the organization is prepared to actively put at stake in order to achieve the desired benefits for the company. In this case, it is about comparing the value of potential benefits with the damages or losses which might occur in case of risk realization.

Some risks are totally unavoidable, and it is out of the reach of the organization to tackle and control them. For example, the risk of any type of terrorist activity arising is a risk that the organization cannot control. In this case, there is a need for a contingency plan.

The principle of risk appetite can be further described as

• Corporate Risk Appetite

This type of risk appetite is the overall amount of risk that is judged to be appropriate for the organization to tolerate and agreed at the board level. It is the duty of the board and all the senior managers of the organization to judge the range of tolerable risk of exposure. They should also identify the general boundaries for the risk that is unacceptable.

• Delegated Risk Appetite

The level of agreed corporate risk appetite can serve as a starting point, and then it travels down the organization to other levels. The effect this swill have is that the high level of risk at one level will be at a lower level for senior management. The benefits the escalation of threat-related decisions when the delegated boundaries are met. The people are empowered to innovate with their delegations.

• Project Risk Appetite

Projects that are outside of day to day business of an organization need to have their own statement of risk appetite. The type of project will have an effect on the type of risk appetite. For example, a plan that offers a substantial reward will have a higher risk appetite from the organization.

Addressing Risks

The idea of addressing risk is to turn the uncertainty into the benefit of an organization. Addressing risks is the art of constraining the risk and taking full advantage of the available opportunities. The actions that are taken by the organization to address the risks is known as an internal control. There are four key aspects that are associated with addressing risks.

• Tolerate

The exposure of the company to threats may be tolerable and not further action is required. Even if the risk is not tolerable, the ability to do something is very limited in some instances. In this scenario, the best strategy to address the risk is to tolerate the existing level of risk. The option can be supported by contingency plans to handle the impact of the risk if it is realized.

• Treat

The most number of risks are addressed by this aspect. The purpose of treatment is to control the chance at an acceptable level while continuing the activity that is causing the risk within the organization. This type of risk addressing can further be subdivided according to the demand.

• Transfer

For some types of risk, the best way of addressing them is to transfer them. This is done in the conventional way of insurance or paying a third party to take the risk in another way. The option is very useful for mitigation the financial risks or converting the chances into assets. The transfer option can be considered to reduce the exposure of an organization to a certain risk or because some other organization is better equipped to handle the risk.

• Terminate

Specific risk is treatable or containable to only a certain level. In another case, termination is the only option to address the risk. It is to be considered that the choice of termination is minimal if the organization is owned by the government as compared to a private organization. The activities that are conducted in the government sector are so great that the associated risks cannot be terminated. The option is quite suitable for private industries and very important in project management if it is apparent that the project cost and the benefits are in trouble.

Reviewing and Reporting

This principle is very important for risk management for two reasons.

• To determine the change in the risk profile of the organization.
• To assure that the measures taken for risk magnet are effective and where the future concentration of actions should be.

Processes should be placed by the organization to check whether the risk still exists and are there any new risks that might impact the company in case of realization. The likelihood and impact of the risks have changed or not. It is compulsory to report the significant changes in order to adjust the risk priorities and deliver assurance on the effectiveness of control. The overall process of risk management should be subjected to regular reviews in order to assure everyone that the management system is appropriate and effective.

The review of risk and the review of the risk management process are very different from each other and are not a substitute for each other. The review process should be planned in such a way that all the aspects of the management process are reviewed at least once per year — making sure that the risks are reviewed with respect to their appropriate frequency. Making specific provisions to the destined level of management in case a new risk emerges or the previous risk changes in order to address the move accordingly.

Conclusion

Risk management is an essential part of every organization. The organization can be government-owned or privately operated the risk management is a crucial part of the management plan. New Risks keep on emerging, and the old risks keep changing their impact. Contingency plans are necessary to be prepared for the risks in case of their realization. The principles of risk management have been discussed in detail in the essay. Risk identification is the first and most important part of risk management. The risk identification has to perform for every new project, and after that, continuous identification is needed to check the changes in the risks. Similarly, the principles of risk analysis and risk appetite are explained in the essay. The levels that need to reports them and establish the boundaries of the risks. Risk appetite classifies how different risk can be tacked according to the limited options available. The importance of reviews and reports is not less any of the principles as it tells about the effectiveness of the current risk management plan in the organization. The challenges that need to be addressed in priority and the new risks that have emerged in the organization are also documented in the reviews and reports.