According to business dictionary, risk management is: the identification, analysis, control, assessment, control and avoidance, minimization, or elimination of unacceptable risk.
Since all aspects of life involves considerable risks, it is important that necessary measures are taken to meet the challenges. Consequently, it takes practical application of every “word” in the above definition to manage risk effectively. I will be discussing them individually. But before then, it is important that you know and apply the principles of Risk management. The International standard organization lists them as follows-
- Value-the amount of resources designated for a “risk” should be lesser than the property it is meant to protect in value.
- It should be part of organizational process
- Uncertainties and suppositions should be considered
- The process should be systematic and well structured
- It should be based on best available information
- It should be transparent
- It should be dynamic and adaptable to change
- It should be continually assessed
- It should be responsive
Having put these principles to their places, you are ready to learn the methods and apply them.
A good step in handling risk effectively is to identify it, but first, (you have to know what a risk or would be risk is). Finding the source of the problem, or potential problem will help you tackle it.
Carefully examine the identified problem, analyze every data derived from the source of the problem so as to find a solution.
Assess the information obtained from analysis, and determine the value, or damage. NOTE: that could be done circumstantially, and therefore, based on solid data derived from the analysis.
Mitigating potential risk tendencies, or developing measures of control when it surfaces. The specific action to take depends on the type of risk. For instance, if there is “identification” of a potential natural disaster risk, “analysis” and “assessment” will enable you to determine a course of action. (It may require evacuating the people in the affected area.) And that is how it is in other sectors of risk management. The value of what you are protecting should be much higher than the expended resources.
Risk avoidance is far better than any other measure one can take on risk management. The key to “avoidance” is ‘identification,’ finding out from the onset that there could be a potential risk will help you to avoid it. For instance, if an investor makes “analysis” on a stock he is about to buy, and therefore, assessed a 50 50 situation on return in investment. He has a chance to avoid the risk totally. In another case, a road user may be faced with the choice of crossing a busy road using the pedestal bridge, or running across the road. The latter is a potential risk that could be avoided by using the first option.
This system is used to contain risk to a minimum degree, especially unavoidable risk. For instance, emergency exits are created in buses to provide alternate escape route in case of an accident. The vehicle could be damaged or burnt, but lives would be saved. In this case, risk is reduced.
Shared risk, also called transferred risk, takes effect when the burden of a risk is shared, or transferred to a third party. This usually happens through insurance or outsourcing. For instance, your health insurance may cover for health issues like accident. When an accident happens, the insurance will replace the car, take care of the medical bill, but the personal injury sustained (like a damaged leg) during the accident must be nurtured by the insured person.
Risk retention is when total responsibility of a risk is taken by an individual or an organization. The reason may be that “the risk” could not be shared, or transferred due to the weight. For instance, the risk of falling a prey to fraudsters could not be shared or transferred, it is therefore expected (in such instances) that all risks be retained by default.
Risk management in general requires applying all necessary measures, according to all issues of risk. Reviewing it occasionally according to international risk standard will make it responsive and adaptable to change.