Risk management project
Instructor- Dr.Riyaz Muhmmad
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MGT202
INTRODUCTION TO RISK MANAGEMENT
Chapter 2
RISK MANAGEMENT
Scientific Approach: Risk management is a scientific approach to the problem of risk that has as its objective the reduction and elimination of risks facing the business firm.
Process : Risk management is the process of identifying, assessing and controlling threats to an organization's capital and earnings.
Instructor- Dr.Riyaz Muhmmad
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Risk Management
In the world of finance, Risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk.
Risk management is a process that allows individual risk events and overall risk to be understood and managed proactively, optimizing success by minimizing threats and maximizing opportunities.
Instructor- Dr.Riyaz Muhmmad
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Definitions of 'Risk Management'
Description: When an entity makes an investment decision, it exposes itself to a number of financial risks. The quantum of such risks depends on the type of financial instrument. These financial risks might be in the form of high inflation, volatility in capital markets, recession, bankruptcy, etc. So, in order to minimize and control the exposure of investment to such risks, fund managers and investors practice risk management. Not giving due importance to risk management while making investment decisions might wreak havoc on investment in times of financial turmoil in an economy. Different levels of risk come attached with different categories of asset classes. For example, a fixed deposit is considered a less risky investment. On the other hand, investment in equity is considered a risky venture. While practicing risk management, equity investors and fund managers tend to diversify their portfolio so as to minimize the exposure to risk.
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The risk management process is a framework for the actions that need to be taken.
There are five basic steps that are taken to manage risk; these steps are referred to as the risk management process.
It begins with identifying risks, goes on to analyze risks, then the risk is prioritized, a solution is implemented, and finally the risk is monitored.
Instructor- Dr.Riyaz Muhmmad
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Risk Management Process
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Steps for Risk Management
Step 1: Identify the Risk
The first step is to identify the risks that the business is exposed to in its operating environment.
There are many different types of risks – legal risks, environmental risks, market risks, regulatory risks, and much more. It is important to identify as many of these risk factors as possible.
If the organization has a risk management solution employed all this information is inserted directly into the system. The advantage of this approach is that these risks are now visible to every stakeholder in the organization with access to the system. Instead of this vital information being locked away in a report which has to be requested via email, anyone who wants to see which risks have been identified can access the information in the risk management system.
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Step 2: Analyze the risk
Once a risk has been identified it needs to be analyzed. The scope of the risk must be determined.
It is also important to understand the link between the risk and different factors within the organization.
To determine the severity and seriousness of the risk it is necessary to see how many business functions the risk affects.
There are risks which can bring the whole business to a standstill if actualized, while there are risks which will only be minor inconveniences in analyzed.
Instructor- Dr.Riyaz Muhmmad
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Steps for Risk Management
When a risk management solution is implemented one of the most important basic steps is to map risks to different documents, policies, procedures, and business processes. This means that the system will already have a mapped risk framework which will evaluate risks and let you know the far reaching effects of each risk.
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Step 3: Rank the Risk
Risks need to be ranked and prioritized.
Most risk management solutions have different categories of risks, depending on the severity of the risk.
A risk that may cause some inconvenience is rated lowly, risks that can result in catastrophic loss are rated the highest.
It is important to rank risks because it allows the organization to gain a holistic view of the risk exposure of the whole organization.
The business may be vulnerable to several low level risks, but it may not require upper management intervention.
On the other hand, just one of the highest rated risks is enough to require immediate intervention.
Instructor- Dr.Riyaz Muhmmad
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Steps for Risk Management
Step 4: Treat the Risk
Every risk needs to be eliminated or contained as much as possible. This is done by connecting with the experts of the field to which the risk belongs to.
In a manual environment this entails contacting each and every stakeholder and then setting up meetings so everyone can talk and discuss the issues.
The problem is that the discussion is broken into many different email threads, across different documents and spreadsheets, and many different phone calls.
Instructor- Dr.Riyaz Muhmmad
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Steps for Risk Management
In a risk management solution all the relevant stakeholders can be sent notifications from within the system. The discussion regarding the risk and its possible solution can take place from within the system. Upper management can also keep a close eye on the solutions being suggested and the progress being made from within the system. Instead of everyone contacting each other to get updates, everyone can get updates directly from within the risk management solution.
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Step 5: Monitor and Review the risk
Not all risks can be eliminated – some risks are always present. Market risks and environmental risks are just two examples of risks that always need to be monitored.
Under manual systems monitoring happens through diligent employees. These professionals must make sure that they keep a close watch on all risk factors.
Under a digital environment the risk management system monitors the entire risk framework of the organization. If any factor or risk changes, it is immediately visible to everyone.
Computers are also much better at continuously monitoring risks than people. Monitoring risks also allows your business to ensure continuity.
Instructor- Dr.Riyaz Muhmmad
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Steps for Risk Management
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A risk management plan increasingly includes companies' processes for identifying and controlling threats to its digital assets, including proprietary corporate data, a customer's personally identifiable information and intellectual property.
Definitions of Risks Management:
It refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk.
The forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact.
Instructor- Dr.Riyaz Muhmmad
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Risk Management Plan
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Assessing Risk Impact
Three factors affect the consequences that are likely if a risk does occur
Its nature – This indicates the problems that are likely if the risk occurs
Its scope – This combines the severity of the risk (how serious was it) with its overall distribution (how much was affected)
Its timing – This considers when and for how long the impact will be felt
The overall risk exposure formula is RE = P x C
P = the probability of occurrence for a risk
C = the cost to the project should the risk actually occur
Example
P = 80% probability that 18 of 60 software components will have to be developed
C = Total cost of developing 18 components is $25,000
RE = .80 x $25,000 = $20,000
Mehr and Hedges, in their Classic/Traditional Risk Management in the Business Enterprise objectives are classified in two categories:
Post-Loss Objectives Pre-Loss Objectives
Survival Economy
Continuity of operations Reduction in anxiety
Earning stability Meeting externally imposed
Continued growth Obligations
Social responsibility Social responsibility
Instructor- Dr.Riyaz Muhmmad
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Objectives of Risk Management
Value Maximization Objectives:
Risk management decisions should be appraised against the standard of whether or not they contribute to value maximization.
Instructor- Dr.Riyaz Muhmmad
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Primary Objectives
Portfolio of risk management is the process by which an organization reduces the likelihood of a risk event occurring or mitigates the effects that risk should it occur. Our preferred way to determine your risk control strategy is to use the four T’s Process:
Treatment of risk
Transfer of risk
Tolerance of risk
Termination of risk
Instructor- Dr.Riyaz Muhmmad
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Portfolio of Risk Management (4T)
Risk treatment follows risk analysis in the risk management process and its goal is to select one or more option for addressing the risk and then implementing the option(s).
The five steps of the risk treatment process are:
Brainstorming and selecting one or more options for risk treatment
Planning and then implementing the risk treatment(s) selected
Evaluating the effectiveness of the risk treatment
Determining if the remaining risk after the implementation of the risk treatment is acceptable (or not)
Taking further risk treatment actions if you determine that the remaining risk is not acceptable
Instructor- Dr.Riyaz Muhmmad
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Treatment of Risk
Risk transfer is a risk management and control strategy that involves the contractual shifting of a pure risk from one party to another.
One example is the purchase of an insurance policy, by which a specified risk of loss is passed from the policyholder to the insurer.
Other examples include hold-harmless clauses, contractual requirements to provide insurance coverage for another party’s benefit and reinsurance.
Instructor- Dr.Riyaz Muhmmad
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Transfer of risk
Risk tolerance relates to risk appetite but differs in one fundamental way: risk tolerance represents the application of risk appetite to specific objectives.
Risk tolerance is best measured in the same units as the related objectives, and associated performance criteria.
Risk tolerance has one basic principle, the risk cost always must be lesser than objective output.
Instructor- Dr.Riyaz Muhmmad
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Tolerance of Risk
Terminating Risk is the simplest and most often ignored method of dealing with risk. It is the approach that should be most favored where possible and simply involves risk elimination.
Instructor- Dr.Riyaz Muhmmad
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Termination of Risk
Risk avoidance While the complete elimination of all risk is rarely possible, a risk avoidance strategy is designed to deflect as many threats as possible in order to avoid the costly and disruptive consequences of a damaging event.
Risk reduction. Companies are sometimes able to reduce the amount of effect certain risks can have on company processes. This is achieved by adjusting certain aspects of an overall project plan or company process, or by reducing its scope.
Risk sharing. Sometimes, the consequences of a risk is shared, or distributed among several of the project's participants or business departments. The risk could also be shared with a third party, such as a vendor or business partner.
Risk retaining. Sometimes, companies decide a risk is worth it from a business standpoint, and decide to retain the risk and deal with any potential fallout. Companies will often retain a certain level of risk a project's anticipated profit is greater than the costs of its potential risk.
Instructor- Dr.Riyaz Muhmmad
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Risk Management Approaches
The process should create value.
It should be an integral part of the organizational process.
It should factor into the overall decision making process.
It must explicitly address uncertainty.
It should be systematic and structured.
It should be based on the best available information.
Instructor- Dr.Riyaz Muhmmad
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Principles of Risk Management