Importance of Risk Assessment

IMPORTANCE OF RISK ASSESSMENT
Risk Pervasiveness
The multifaceted corporate world is fast-changing and is largely influenced by the digital world. New
developments in information technology including areas such as artificial intelligence and
robotics have brought about major changes in business models. On the receiving end, the
consumers are influenced by the new developments in social media. The watchful digital companies
have been effectively gaining from this opportunity by wisely utilizing the emerging trends.
Nevertheless, this has been creating trouble for traditional players and business models. While
exploiting the new trends of the digital environment, there is a high inherent risk of breaches into the
system including cyber-attacks.
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Besides digitalization and its growing opportunities combined with its essential risks, climatic changes
also hinder the operational performances of organizations, equally demanding is the regulatory
framework that exerts pressure on the system. Climatic and geopolitical risks require more care and
attention toward natural surroundings and pose a great challenge for both domestic and international
companies. It is also noticed that risks that were considered to be less probable of occurring are now
seen frequently occurring.
Drivers of Risk Assessment
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The drivers or the causes that induce the occurrence of risks are listed as follows:
Advanced technological developments, in a complex and dynamic environment that is

changing the world scenario at an accelerating pace
Accelerating the pace of change in digital technology is the key to such advancements.
Organizational models are changing with the advent of new automation that is based
on robotics and artificial intelligence.
Swift decisions are taken by consumers and manufacturers
Preferences are shifting under the influence of social media and trending news.
New types of digital companies are disrupting traditional market leaders and business
models.
The dangers of digital attacks and breaches of all kinds are growing.
Impact of Risk on Corporates
Emphasizes Profitability
Climate change is creating an impact on operations
Consumers and regulators demand better business conduct
Geopolitical risks are likely to change the business environment and evolve as a challenge for
multinationals
Corporate rules are vulnerable to single events
Events that had remote chances of occurring are materializing in reality
What is Risk Assessment
Risk assessment is a method by which an organization identifies risks and pertinent risks following
which they design effective control measures to alleviate such risks. It is one of the organized
methods to ensure the health and well-being of the employees and make sure of their safety while in
the workplace. It also includes developing measures and implementing them to control and eliminate
risk.
Risk management involves two major aspects viz., risk recognition and risk rating. British Standard BS
31100 explains risk assessment as “the overall process of risk identification, risk analysis, and risk
evaluation”. Risk assessment, therefore, is to identify risks in the organization or a project and rate
them. As risk management is inclined towards effective decision-making, risk assessment plays an
invaluable role in the formulation of strategies. Assessment of risk, therefore, is necessary and
can be carried out in all aspects where there are potential risks such as in the case of accomplishment
of organizational objectives, customer requirements, stakeholders’ anticipations, every other policy,

process, and procedure. Risk assessment is thus meant to understand the major risks that are likely
to affect a particular event. They are meant to take appropriate decisions and are the first stage in
the process of risk management.
It is vital to understand whether the risk that is being studied is assessed on an inherent level or its
residual level. However, the recommendation of ISO 31000 is that risk assessment considers risks at
both inherent and residual levels.
Importance of Risk Assessment
Asset-specific risk is unique to an asset. Asset-specific risks are independent of one another and
hence an investor can diversify specific risks by when combined with other assets. A collection of
assets such as stocks, bonds, cash or cash equivalents, commodities, etc. on which
investment is done is termed as a portfolio. The classic portfolio theory states that by investing
in adequate and diverse assets, investors can minimize asset-specific risks. The investor also needs to
hold risk-free assets along with other investment options, however, combining a good proportion of
the assets meticulously largely depends on the risk appetite of the investor himself.
The following segment describes why corporates need to emphasize each risk that they encounter
in their organization.
Bankruptcy Costs: All costs related to bankruptcy are significant. In case investors consider
that bankruptcy is an insignificant issue, then the cost relating to the restructuring of the
organization or its shutdown would minimize the present value of the company. In this manner,
if risk management is implemented in an organization, it could enhance the value of the
company by minimizing uncertainties.
Taxes: Most tax systems are designed in such a way that the tax benefits of previous years’
losses are carried forward. Therefore, other things being constant, reducing the fluctuations in
the pretax income in the future would minimize the net present value of tax payments about
the future. This could eventually aid in enhancing the value of the organization by curtailing the
fluctuations in income.
Capital Structure and the Cost of Capital: One of the major issues faced by corporates is
their inability to pay off their debts. Generally, the risk of a firm increases as the ratio between
debt and equity increases. It is, therefore, one of the functions of risk management to facilitate
a higher debt-equity ratio for an organization if debt financing is a comparatively inexpensive
source of funds or if the firm is aggressive by nature.
Compensation Packages: Since all organizations hire employees based on firm-specific
requirements, there is an inherent requirement to pay higher compensation for the employees
as the nature of the risk of the organization increases. Higher cost for compensation is required
to be paid not only to the new entrants but also to the existing employees to retain them in the
future. Effective risk management techniques are thereby necessary to minimize the
cost of hiring and retaining key personnel in an organization.
The motive behind risk management is to ensure that the project heads focus on project risk
management and also to provide all the requisite facilities to accomplish the objectives. Following
are some of the functions of risk management techniques.
To identify the risks that are worth investing in about the time and energy involved in them.
Differentiate and optimize risk
Emphasize improving positive risk and discarding negative risks wherever possible
Create different courses of action
Provide reserves both in terms of time and funds to manage risks that are less likely to be
alleviated.
To make sure that the limits of the project and organizational risks are not violated.
Purpose of Risk Management


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IMPORTANCE OF RISK ASSESSMENT

Drivers of Risk Assessment

© 2024 Athena Global Education. All Rights Reserved

Advanced technological developments, in a complex and dynamic environment that is

Impact of Risk on Corporates

What is Risk Assessment

© 2024 Athena Global Education. All Rights Reserved

Importance of Risk Assessment

Purpose of Risk Management

© 2024 Athena Global Education. All Rights Reserved

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