WHAT IS RISK MANAGEMENT?
Risk management is a systematic process for the identification and evaluation of pure loss exposures faced by an organization or individual and for the selection and administration of the most appropriate technique for treating such exposures. Risk management is a broader concept. Risk management is a scientific approach to the problem of pure risk, which has its objective the reduction and elimination of pure risks facing the business firm.
Risk management can be defined as the process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals.
For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.
Risk management is the activities that are undertaken to reduce exposure to loss. For insurance companies, risk management is of the utmost importance because insurance is the business of risk assumption. There are innumerable activities which are involved in insurance risk management, which require both specialized skills and centralized oversight to perform successfully. Given the changes witnessed in the recent past by the insurance industry, as well as changes expected to occur in the future, these activities are beginning, appropriately, to fall under tighter executive management scrutiny and control.
It is a scientific approach to deal with pure risks by anticipating possible accidental losses and designing and implementing procedures that minimize the occurrence of loss or the financial impact of the losses that do occur. Risk management is the identification, assessment, and prioritization of risk followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events ol uncertain or unpredictable root-cause. Risk management ensures that an organization identifies and understands the risks to which it is exposed. Risk management also guarantees that the organization creates and implements an effective plan to prevent losses or reduce the impact if a loss Occurs.
A risk management plan includes strategies and techniques tor recognizing and confronting these threats. Good risk management doesn’t have to be expensive or time consuming. Risk management provides a clear and structured approach to identifying risks. Having a clear understanding of all risks allows an organization to measure and prioritize them and take the appropriate actions to reduce losses. Risk management has other benefits for an organization, including:
- Saving resources: Time, assets, income, property and people are all valuable resources that can be saved if fewer claims occur.
- Protecting the reputation and public image of the organization.
- Preventing or reducing legal liability and increasing the stability of operations.
- Protecting people from harm.
- Protecting the environment.
- Enhancing the ability to prepare for various circumstances.
- Reducing liabilities.
- Assisting in clearly defining insurance needs.
An effective risk management practice does not eliminate risks. However, having an effective and operational risk management practice shows an insurer that our organization is committed to loss reduction or prevention. A risk management policy statement offers several advantages. Such a policy statement is necessary in order to have effective administration of the risk management program. The policy statement states the risk management objectives of the firm and company policy with respect to treatment of the loss exposures. In addition, a risk management statement has the advantage of educating top- level executives in the firm about the risk management process.
Also, the written policy statement enables the risk manager to have greater authority throughout the firm. Finally, the policy statement provides a standard for judging the risk manager’s performance. There are personal risks management and corporate management risk.