Before discussing risk management we need to understand what is ‘risk’? A risk is ‘uncertainty of outcome’. When an action is taken, and the probability of the outcome is uncertain, it is called as risk. There are risks involved in every action that is taken. Setting up a business is a risk, buying a house is a risk. The topic of risk management has diversified so much that from risk management of financial institutes to software have all become specialised fields. What is understood or practiced generally as risk management is explained below.
1. Identification of a risk
2. Working out the probability of risk occurring
3. Determining the consequences of a risk occurring
4. Finding ways of reducing a risk
5. Reducing the probability of a risk occurring.
Before starting out on any venture, all types of potential risks that can occur and tune into a reality are identified. Let’s consider a simple example; if you go to cross a street, you expose yourself to the risk of being hit by a speeding car. If it’s a crowded street with lots of traffic, the probability of this happening becomes even higher.
Now if a speeding car hits you, the least that can happen to you is that you might sustain minor cuts and bruises. The worst outcome would be you being killed. Now, when you know what the consequences of taking a risk can be, you will find a way of reducing the risk. How do you do that? In this case you will look for the nearest pedestrian crossing and use it. In this way, you will be reducing the risk factor involved in crossing a busy street.
Risk management in any project follows the same basic principles. When a credit card company issues you a credit card, they first run a credibility check. They check to see if you will be able to repay your bills. Based on your income and your expenses they issue you a credit card. If they feel that you are at a greater risk they will cap the credit limit accordingly.
Insurance companies take a risk when they sell insurance. For example, an insurance company sells general insurance. They have several sales agents who are selling insurance. Now, if the insurance company finds out that eighty percent of the shops and offices in a building have been insured by them. They will immediately ‘spread’ the risk. How they do it is by getting underwriting companies to cover part of the insurance. If the building catches fire, the insurance company plus the underwriters would bear the loss. In case the insurance company does not spread the risk, they would have to pay the entire insurance and the company is likely to fold up in such an event.
Similarly, a bank is under risk if they invest all their capital in a single venture. If the venture fails, the bank will collapse. In property, stocks, and any other business, risk management plays a key role.
In factories and work places risk management teams evaluate the likelihood of disaster occurring. Then they suggest ways of reducing the possibility of that risk occurring. Making workers wear protective and safety gear is a means of risk management.
The gist of risk management is to try to reduce the chances of a tragedy from occurring. Identifying possible risks and reducing the chances of its occurrence. There are unknown risks that can occur and are generally overlooked when doing risk management. Like an earthquake occurring in an area which has no history of earthquakes and is not on a fault line. Such a risk would be left out of the scope of risk management.
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