We have throughout portrayed risk as having a negative effect e.g. great steps in medical fields have been achieved at the personal risk of those researchers prepared to test drugs and treatment; risk is also at the very heart of any free market economy i.e. it enables wealth to be created. In summary therefore risk can be negative or positive and the challenge to us is to manage the risk to which a business is exposed. This has led to the evolution of the discipline of risk management – which is the identification analysis and economic control of those risks which threaten the assets or earning capacity of an enterprise.
Definition of Risk management
It has also been defined as the logical development and carrying out of a plan to deal with potential losses. It can also be defined as the human activity which integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources. Risk Management involves:
- Identifying and measuring potential risk.
- Develop and execute a plan to manage these potential losses.
- Continuous review of the plan after it has been put into operation.
Nature of risk management
Buying of insurance was the traditional role of risk management and was the key function of risk managers. A part from purchasing insurance, other functions of a risk manager are:
- Assists the organization identify the risk
- Implement a loss prevention and control programmes
- Review contracts and documents for risk prevention and management purpose
- Provide training and education on safety related issues
- To ensure compliance with laws and government regulation. This will involve monitoring changes in the laws and implementation requirements from various stake holders
- Claims management and working with legal representatives to manage litigation risks.
- Designing and co-coordinating employee benefit programmes, including retirement packages
- Currency hedging i.e protects the organization from adverse affects arising due to fluctuations of currency. The risk manager can recommend the purchase of a stable currency or money equivalent in an effort to protect the organization.
- Government lobbying – Where the risk manager constantly interacts with influential persons in an effort to ensure that government policies do not adversely affect the company.
- Advice on company restructuring including acquisition and mergers even disposals. The purpose will be to avoid diverse effects of the restructuring from affecting the company Public relation.
Principles of risk management
Risk Management should;
- Create value
- Be tailored
- Take into account human factors.
- Be transparent and inclusive.
- Be dynamic, iterative and responsive to change.
- Be capable of continual improvement and enhancement.
- Be transparent and inclusive.
- Be an integral part of organization processes.
- Be part of decision making.
- Explicitly address uncertainty.
- Be systematic and structured.
- Be base on the best available information
Risk Management Policy
Is an organization’s written statement that sets out its approach to risk management. Its objective is to safeguard the organization’s property, interest and certain interest of employees during the conduct of business.
Benefits of risk management policy statement.
- It enables the organization to survive in case of emergency situation i.e. a policy that document measures to be taken in case of fire out break may save the organization from suffering severe losses when such occur.
- Reassures staff, stakeholders and governing body in business of the organization going concern capacity. This could give the insurance a hedge over its competitors.
- Support Strategic and Business Planning. A risk Management policy statement would support an efficient development of business plan by the organization since it avails information on how to cater for potential risks.
- Enhances communication between production, sales, marketing and Administration department.
- Improves the organization’s ability to meet objectives and achieve opportunities.
- It encourages organization to take activities that have a high level of risk because risk can be identified and are well managed, so that the exposure to risk is both understood and acceptable.
- It ensures survival and growth of the business even after making losses.
- It leads to minimization/prevention of losses which occurs due to unstructured procedures.
- Enables quick assessment and gasp of new technology.
- Supports the effective use of resources.
- Promotes continuous improvement.
- Well prepared risk management policy makes the company socially responsible towards its environment, employees, suppliers, customers, and the communities in which it Operates
- Well prepared risk management policy assures the firm of stability of earnings.