Every person and business faces a state of uncertainty, known as risk. Risk involves the uncertainty state that will happen if an adverse event occurs. Different people have different attitude towards the risk.
For e.g. jumping out of a plane with a parachute may be risky thing to do for some and may not be risky for others who indulge in specific sports activity. A person's aversion to risk is a key factor in the extent to which (s)he will try to manage his(er) risks.
People often think of risk as the chance of something bad happening. “Bad” and “Chance” are two key elements of risk.
Bad refers to an event or outcome that is adverse and is also relative for e.g. losing more money is worse than loosing less money.
And Chance refers to probability of occurrence of the bad event with change of scenario.
Types of Risks
The different types of risk are summarized below
- External Risk
- Operational / Organizational Risk
- Financial Risk
- Personal Risk
External Risk
External risk includes the risk involved in the Ecosystem, may be classified as following:
- Political : possible political constraints like a change of government
- Infrastructure: power supply, suppliers, dependency on internet
- Market : competition and supply of goods
- Disaster : fire, flood, earthquake, Militancy
- Economic : interest rates, exchange rates, inflation
- Environmental : fuel consumption, pollution
- Legal and Regulatory: health and safety legislation
Operational / Organizational Risk
Operational / Organizational Risk includes the risk involved in the process, may be classified as following:
- Policy : appropriateness and quality of policy decisions
- Operational : procedures employed to achieve particular objectives
- Information : adequacy of information used for decision making
- Reputation : public reputation of the organization and consequent effects
- Transferable : risks that can be transferred
- Technological : use of technology to achieve objectives
- Innovation : exploitation of opportunities to make gains
- Personnel : availability and retention of suitable staff
- Project : project planning and management procedures
Financial Risk
Financial Risk includes the risk related to financial matter, may be classified as following
- Budgetary : availability and allocation of resources
- Fraud of theft : unproductive loss of resources
- Insurable : potential areas of loss that can be insured against
- Capital investment : making appropriate investment decisions
- Liability : the right to sue or be sued in certain circumstances
Personal Risk
Personal Risk includes the following;
- Death
- Disability
- Personal injury
- There is also other kind of risk such as public risk, property risk etc.
Risk Management
Risk management is very crucial thing in the present scenario. It is the process of making decisions and carrying it in such a way that risk is minimized. To minimize the effect of various kinds of risk and to successfully achieve the different life goals, individual should do risk management. Risk management simply fights the risk and decreases loss.
How Risk Management is done.....???
Firstly one needs to identify the sources of property, income, liability and personnel risks from which losses may arise. It begins by taking a close look at each of the clients business operations and assess what could cause a loss.
After identifying the risk one need to evaluate the risk involved in each exposure in terms of expected frequency, severity and impact. Now when the risk is evaluated one need to try to terminate the risk by various ways such as
- Avoidance : not getting into something which has risk, it is simple but not appropriate strategy for dealing
- Retention: there are certain risk which are retained but not addressed, this strategy is appropriate for risks that occur frequently but are of low severity for e.g. risk of getting tire punctured (They are considered as Normal Loss)
- Risk transfer: risk can be transferred by insurance and non insurance transfers for e.g. any contractual agreement, Hedging
- Loss Control: it means minimizing the severity of the losses if they should occur for e.g. relocating valuables from home to safety deposit box in banks to prevent from the risk of theft or making TDS mandatory to restrict avoidance of tax payment.
Once risk management program is implemented then it is needed to be monitored to assure that it is serving its purpose effectively.
Thank you and Regards
Sincerely,
Sandip De
Business Analysis and Development Consultant: Ambidextrous
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