Risk management process is essential for businesses and individuals. It helps to reduce or eliminate various risks that companies and individuals are exposed to on an ongoing basis. Risk management process allows for constantly scanning the environment for potential dangers and developing mitigation plans or strategies to eliminate or reduce the risks.
Below are 5 risk management steps or principles for applying in businesses and personal life.
The starting point of a good risk management strategy is being able to identify the risks. These risks may be associated with an individual, customers or a business.
Business risks are wide-ranging and may emanate from within and outside a business. External threats include theft, vandalism, looting, damage by fire, flood or other natural disasters, and financial loss due to several factors, including recession, political instability, changes in consumer behaviour and other factors. Non-payment by key clients and reduced market share because of the growing number of competitors can also negatively impact a business.
Internal risks for businesses that can be identified through risk management include employee theft, loss of talent, loss of reputation, injuries and even deaths of employees.
Risk management identification for individuals is also just as important as risk management identification in businesses. An individual may face several risks such as road or plane accidents, theft of belongings, attacks, domestic violence, illness including terminal illness and financial loss due to job losses or bad investments.
Tips for risk identification:
The below tips are helpful when identifying risks as part of risk management. If you run a business, you may want to consider some of the following:
Is your business situated in a high or low-crime area? Is it located in the middle of the city, where it is vulnerable to demonstrations and marches? Is it located in a street with poor lighting? Which hours does your business operate? Is the type of work that your employees perform high risk? What dangers are they exposed to in their work?
Individuals need to ask themselves some of the following questions. Is the area where I live safe? Does my family have a history of dreaded diseases? Where do I drive my car, and where do I park it? Is my work hazardous?
Having identified the risks, their analysis is essential to risk management. This involves looking at each threat identified in a business and assessing its likelihood to occur or happen over a period and its severity.
For instance, depending on where the business is situated and a country’s political or economic volatility, its likelihood of being vandalised or looted may be higher than damage by natural disasters. Its severity on the business may be dire in terms of financial losses and the ability for the specific business to remain in operation. The negative ripple effect could be job losses, bankruptcy, or liquidation.
Similarly, for individuals, depending on the neighbourhood one lives in, the chances and frequency of being mugged and violently attacked may be higher than getting involved in a car accident.
Risk analysis as part of risk management leads to what-if scenarios and helps risk management professionals arrive at an event’s potential frequency and severity.
Tips for risk analysis:
- Define the levels of uncertainty
- Look at all scenarios
- Assess the probability of an event happening
- Estimate the impact of the uncertainty from minor, moderate, major, or critical
- Put together an action plan to mitigate the risk
Once the risk has been identified and analysed, the next step is risk control. This is also important in the overall risk management process. This step involves looking at ways to control or reduce the identified risks, their severity and frequency.
For instance, a business in an area that makes it vulnerable to theft or shoplifting may reduce or control the risk by installing cameras and or hiring security personnel to patrol the company. At the same time, it may be getting insurance cover for theft.
Similarly, as part of a personal risk management strategy, an individual may deploy actions such as walking in a group instead of alone in an environment where the risk of muggings is high. They may also decide to be out in the street during the day and not at night or get martial arts or other self-defence training.
Tips for risk control:
Study the business solutions to avoid, prevent, and reduce illness and injury. This can include everything from loss control to health and safety programs. Then, focus on prioritisation and implementing practical solutions to fill the gaps.
Similarly, one needs to implement ways of avoiding and preventing illnesses and injuries at an individual level. This includes putting in place mitigation strategies and then focusing on priority ones.
Risk financing is also an essential aspect of risk management. It allows the business or the individual to finance their risk. For instance, in the case of a company situated in a location that makes it vulnerable to vandalism and looting, the business would take up vandalism, looting and riot insurance. This will enable the company to be compensated for such events.
Individuals may choose to get dreaded insurance coverage if they have identified and analysed that they are at a high risk of getting a dreaded disease. This will enable them to continue earning when they become sick and cannot continue working.
Tips for risk financing:
- Carry the proper amount of insurance for yourself or your business
- Maintain adequate emergency funds
- Diversify your investments
- Have a second source of income
- Have an exit strategy for every investment you make
- Maintain your health
- Always read the fine print
Claims management is an aspect of risk management that involves the management of a loss or losses incurred. It consists of filling and submitting claims forms for whatever loss has been incurred. For instance, a car accident, theft, or damage to enable appropriate compensation to the individual or the business.
A risk management business typically assists an insured company or individual in lodging a claim.