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    Definitions, Descriptions, Types & Scope of Risks

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    TAKELE NEDESA

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    Definitions, Descriptions, Types & Scope of Risks

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    TAKELE NEDESA
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    8 views4 pages

    Definitions, Descriptions, Types & Scope of Risks

    Uploaded by

    TAKELE NEDESA

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    DEFINITION, DESCRIPTION, TYPES, SCOPE OF RISKS

    Definition and Description

    As the future remains uncertain, it has been a challenge even for the experts to have been able to
    consistently predict the movements in the stock market, the changes in the interest rates,
    fluctuations in the exchange rates, or the variations in the commodity prices at any point
    in time.

    Source: depositphotos.com

    The Institute of Internal Auditors (IIA) states that risk; which is determined in relation to outcome
    and probabilities, is defined as the uncertain element in the occurrence of an event that could affect
    the accomplishment of the organizational goals. Risk being an abstract terminology has been defined
    by different authors in diverse dimensions. Health and safety experts consider the likelihood and the
    degree of intensity as the measure of risk, however, while defining general risk management, this
    definition may not suffice.

    According to the Institute of Risk Management (IRM), “ Risk is the combination of the probability
    of an event and its consequences”. It is to be noted that the consequences could be
    positive or negative.

    Further, ISO Guide 73 ISO 31000 states that risk is “ the effect of uncertainty of objectives”. It
    clarifies that an effect could be negative, positive or a deviation from the anticipated results. Risk
    could be a change in the situation or a consequence.

    In an organizational perspective, risk can be termed as that which can affect the accomplishment of
    organizational objectives. Usually, organizational objectives are not completely defined, nevertheless,
    wherever it is stated, it is shown in relation to changes and developments that are expected to
    happen in the future. For instance, in the case of employees in the organization, objectives refer not
    merely to the day-to-day operations but the changes or developments the management seeks to find
    in an employee at certain intervals of time.

    While defining risk, it is necessary to consider the happening of an event. When events are analyzed,
    it is easier to understand risk, as for instance, consider the happening of an award night; the
    occurrences that hinder the smooth happening of the event are the risks.

    Of late, the events that have shaken the world such as the pandemic itself, extreme climatic
    conditions, and terrorism combined with the economic slowdown, all have created a severe impact on
    trade and commerce across the world. These risks exist over and above the usual risks involved in

    © 2024 Athena Global Education. All Rights Reserved


    one’s day-to-day life.

    The reflex that one shows toward risks is spontaneous as while encountering an accident or when a
    fire breaks out. The outcome of such contingencies is always negative and hence termed as hazard
    risks. The essence of risk management is to gauge the severity of risks and determine the
    most suitable reflex in relation to the same.

    On the other hand, there are certain risks that require a mandatory response. For instance, on the
    purchase of a vehicle, the owner takes insurance to cover any future risks pertaining to the asset,
    which is in fact a legal prerequisite. However, purchasing insurance coverage for a house or land is at
    the owner’s discretion.

    Automobiles such as cars are usually well maintained and serviced at regular intervals so as to avoid
    any malfunction. Regular servicing and maintenance could minimize the risk of malfunctioning, but
    not entirely. Such circumstances where there is a higher degree of uncertainty associated with it are
    termed control risks.

    There are certain risks that people take up expecting favorable financial returns. For example,
    investing in stocks, gambling or betting in horse racing, etc. Other types of risks are such that they
    are potentially highly risky but the person involved looks forward to satiating his pride and self-
    esteem more than any financial gains. Typical examples include participating in motorsports and
    those leisure activities that are potentially considered to be dangerous. Such risks where we expect
    positive returns are termed opportunity risks.

    Types of Risks

    Risks to organizations are uncertainties that could generate positive or negative results. Risks are
    different from each other and therefore need to be analyzed individually. Risks are categorized as:

    Hazard Risks also called Pure Risks


    Control Risks also called Uncertainty Risks
    Opportunity Risks or Speculative Risks

    Hazard or pure risks always result in undesirable or unfavorable results. The fortunate part is that
    they are insurable. Generally, organizations show a certain degree of tolerance towards these kinds of
    risks. For instance, a typical example of hazard risk is theft and organizations maintain a certain
    level of acceptance of such risks.

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    Control risks by nature are associated with uncertainties that the organizations want to mitigate,
    be it in relation to the outcome of a project, the time taken to complete the project, the cost and
    adhering to its specifications. In regard to project management, it is necessary to ensure that the
    actual results lie within the anticipated range.

    Conversely, a deliberate attempt is seen in some organizations to face certain kinds of risks such as
    commercial or market risks anticipating excessive monetary benefits. Such risks are speculative in
    nature and aggressive organizations, on purpose, welcome such risks.

    Hazard risks have been gaining more attention in relation to risk management studies and therefore
    are said to be the earliest division of risk management. Hazard risks are seen widely in
    organizations and are such that they affect the accomplishment of objectives of an organization.

    Control risks cannot be anticipated or controlled and are widely seen in project management. They
    are extremely difficult to quantify. Risk management for control risks thus focuses on reducing the
    likelihood of happening of unanticipated risks.

    Opportunity risks are not usually tangible in nature; however, they are quantifiable. A peculiar
    feature of opportunity risk is that taking or not taking the opportunity could be a risk. For instance, in
    the case of organizations, acquiring an asset, relocating to economic zones, diversification of
    products, etc. are opportunity risks. In spite of the fact that opportunity risks are taken to gain
    monetary benefits, the outcome could turn out to be adverse.

    Risk Description

    Describing a risk is necessary to bring better clarity in understanding and effectively mitigating risk.
    Risk description of any or all of the below-mentioned pointers–

    Name of the Risk


    Nature of Risk
    Classification of Risk
    Anticipated time of Occurrence of Risk
    Scope of the Risk
    Possible Occurrences and Dependencies
    Internal and External Stakeholders likely to be affected by the Risk
    Risk Attitude – State of mind in Relation to Risk
    Risk Appetite – the Degree of Uncertainty the Enterprise is ready to take
    Tolerance to Risk – the Margins Accepted in Relation to the Risks
    The Possibilities and the Intensity with which the Risk could Strike if it Happens to Materialize
    Target level of Risk
    Control Mechanisms and Activities that are Currently Practiced
    Need to develop risk control strategies and policies
    Improving the confidence level over the current control mechanisms
    Risk mitigation possibilities with the existing facilities
    Measures suggested for risk mitigation
    Time Limit for Implementation
    Accountability for implementing measures to minimize risk
    Audit of risk compliance

    (Source-Fundamentals of Risk Management Understanding, evaluating and implementing


    effective risk management Paul Hopkin)
    © 2024 Athena Global Education. All Rights Reserved
    Scope

    Risk management is explained as a “method of managing that concentrates on identifying and


    controlling the areas or events that have a potential of causing unwanted change… it is no
    more and no less than informed management” (Caver 1985). Risk management is a vital
    component of project management and is not different from other project management activities.
    From the perspective of a project manager, risk management methods need to focus essentially on
    two dimensions, viz., the positive results called the opportunities and the negative results called the
    threats. includes both opportunities and threats.

    © 2024 Athena Global Education. All Rights Reserved

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