Risk Management & Analytics
Risk Management & Analytics
Risk management is the process of assessing or measuring risk and formulating strategies to manage it. It is a systematic approach that involves identifying, analysing and controlling the areas or events with the potential of causing unwanted change. It is through the management of risk that risks to any specific program are assessed and systematically managed to reduce risk to a considerable level. Risk management is the practice of controlling risk. This would include risk planning, assessing risk areas, developing risk handlings options, monitoring risks to determine how risks have changed and documented the overall risk management program. This article discusses Risk Management & Analytics and the various aspects of the same.
Objectives of Risk Management
The following are the objectives of Risk Management.
- Anticipating the uncertainty and the degree of change of the events not happening they are planned.
- Channelising events to happen the way they are planned.
- Setting right deviations from plans, as they occur and at the earliest opportunity.
- Ensuring that the objectives of the planned event are achieved by alternative means even when the means chosen, proves wrong.
- In the case of an unexpected event, controlling the damage to a minimum.
Risk Management Process
The following are the steps that are involved in Risk Management.
Step 1: Risk Identification and Assessment
This involves event identification and the process of data collection. The institution has to implement a system of gathering information either through Key Risk Drivers (KRIs) or through a rating system. Once the risks are identified, combine like risks according to the following critical areas impacted by the risks such as people, mission, physical assets, financial assets, and stakeholder trust.
Step 2: Risk Qualification and Measurement
The following step is to Quantify and Measure risks. This means that the risks have to be rated according to probability and impact. There are various standard tools are used by financial institutions to measure risk and understand their implications concerning capital or its importance to the organisation through a scoring technique.
Step 3: Risk Analysis, Monitor and Reporting
The following step is risk analysis, monitoring and reporting. Doing this will help one to get the big picture and decide the approach to risk management.
Step 4: Capital Allocation
Risk Analysis, Monitoring and Reporting sends information to the top management of the organisation to take strategic decisions. Capital allocation plays a crucial role in management decision making.
Step 5: Risk Management and Mitigation
The final step is to make the right strategic decisions to manage the risk and thereby, mitigating the risk.
Risk analytics is a procedure to identify threats and vulnerabilities, analyse them to determine the exposures, and help highlight how the impact can be eliminated or reduced. In other words, risk analytics refers to the uncertainty of forecasted future cash flows streams, the variance of stock returns or portfolio, statistical analysis to ascertain the chances of a project’s success or failure, and possible future economic states. Risk analysts occasionally work in tandem with forecasting professionals to minimise future adverse unforeseen effects. The main steps for Risk Analytics are as follows.
- Risk Mapping
- Risk Retention
- Risk Mitigation
Risk mapping is the initial step in operational risk measurement since it requires identifying all the potential risks to which an organisation is exposed and then pointing out those on which attention and monitoring would be warranted. A risk map is generally a graphical depiction of a select number of a company’s risks designed for the following reasons.
- To illustrate the impact or significance of risk on one axis.
- To illustrate the likelihood or frequency on the other axis.
Benefits of Risk Mapping
- Promotes awareness of notable risks through priority ranking, facilitating the effective planning of resources.
- Enables the delivery of resolutions and services across the complete risk management value chain.
- Serves as a sturdy aid to strategic business planning.
- Aids the evolution of an action plan for the efficient management of significant risks.
- Assigns specific responsibilities to individuals for the management of selected risk areas.
- Provides a chance to leverage risk management as a competitive advantage.
- Helps in the improvement of a strategic approach to insurance programme design.
- Maintains the design of a client’s risk financing and insurance program through the advancement of effective retention levels and scope of coverage etc.
This denotes acceptance of the loss or benefit arising out of a risk when it takes place. In short, it is also termed as self-insurance. This strategy is viable when the risks are small enough to be transferred at a cost that may be higher than the loss arising out of the risk itself. On the other hand, the risk can be so significant that it cannot be transferred. Such risks will have to be phased out when the eventuality occurs.
The reason for risk retention can be cited as follows.
- While the risk in business is taken to increase its return, risk retention related to such risks which have no relation to return but are part of an individuals life or organisation or a company operational risk can be cited as such a risk that is inherent and needs to be accepted for retention.
- Sometimes, such risks are so small that they are ignored and phased out when they surface.
- This method is also useful when the probability of occurrence is very low and a reserve built within the system over a period can take care of such losses arising out of risk retention.
- In some instances, the subject, who is susceptible to risk, also becomes fully aware of the nature of risk. Here, there is a certain amount of preparedness in the system due to risk retention.
Risk reduction or optimisation aims at reduction in the severity of law or the probability that law may not be passed. While risks can be helpful or harmful, optimisation leads to a balance between adverse risks and the advantages of the operation. Risk reduction can also be termed as mitigation that would include all measures taken to reduce the effect of the hazard itself as well as the vulnerable conditions leading to the danger. Risk reduction also contains steps to mitigate the physical, economic, and social vulnerability. Risk mitigation also implies a certain extent of preparedness on the part of the risk bearer because the individual is aware of the risk. This helps to identify the parameters that lead to the disaster and mitigate parameters ahead of the eventuality, thus reducing the risk.