Chapter 8 Risk and The Risk Management Process

Risk and the Risk Management Process
 Risks are the opportunities and dangers

associated with uncertain future events.
 Risks can have an adverse ('downside
exposure') or favourable impact ('upside
potential') on the organisation’s objectives.
Believe in “Murphy’s Law”: Everything that can go
wrong will go wrong!
Why Manage Risk
 Management needs to manage and monitor
risk on an ongoing basis for a number of
reasons:
 To identify new risks that may affect the
company so an appropriate risk management
strategy can be determined.
 To identify changes to existing or known risks
so amendments to the risk management
strategy can be made..
 To ensure that the best use is made of
opportunities.
Risk Management
 Risk management is therefore the process of
reducing the possibility of adverse
consequences either by reducing the
likelihood of an event or its impact, or taking
advantage of the upside risk.
 Management are responsible for establishing
a risk management system in an organisation.
Risk Management Process
Risk Identification
Strategic Risks
 Risks arising from the possible consequences
of strategic decisions taken by the
organisation.
 Also arise from the way that an organisation is
strategically positioned within its
environment.
 Should be identified and assessed at senior
management and board or director level.
Operational Risks
 Refer to potential losses that might arise in
business operations
 Include risks of fraud or employee
malfeasance, poor quality production or lack of
inputs for production
 Can be managed by internal control systems.
Types of Risks
Types of Risks
 Market risks. Risks which derive from the sector in which
the business is operating, and from its customers.
 Product risk. The risk that customers will not buy new
products (or services) provided by the organisation, or
that the sales demand for current products and services
will decline unexpectedly.
 Commodity price risk. Businesses might be exposed to
risks from unexpected increases (or falls) in the price of a
key commodity.
 Product reputation risk. Some companies rely heavily on
brand image and product reputation, and an adverse
event could put its reputation (and so future sales) at risk.
 Credit risk. Credit risk is the possibility of losses due to
non payment, or late payment, by customers.
 Political risk. Political risk depends to a large extent
on the political stability in the countries in which an
organisation operates and the attitudes of
governments towards protectionism.
 Legal, or litigation risk arises from the possibility of
legal action being taken against an organisation.
 Regulatory risk arises from the possibility that
regulations will affect the way an organisation has to
operate.
 Compliance risk is the risk of losses, possibly fines,
resulting from noncompliance with laws or
regulations.
 Technology risk arises from the possibility that
technological change will occur.
 Economic risk refers to the risks facing
organisations from changes in economic
conditions, such as economic growth or
recession, government spending policy and
taxation policy, unemployment levels and
international trading conditions.
 Environmental risk arises from changes to the
environment over which an organisation has no
direct control or for occurrences for which the
organisation might be responsible.
 Business probity risk is related to the
governance and ethics of the organisation.
Assessing Risks
• Risks with a significant impact and a high
likelihood of occurrence need more urgent
attention than risks with a low impact and low
likelihood of occurrence
• The severity of a risk can also be discussed in
terms of 'hazard'. The higher the hazard or
impact of the risk, the more severe it is.
Risk Planning
 The board of an organisation plays an important role in risk
management.
 It considers risk at the strategic level and defines the
organisation’s appetite and approach to risk.
 The board is responsible for driving the risk management
process and ensuring that managers responsible for
implementing risk management have adequate resources.
 The board ensures that the risk management strategy is
communicated to the rest of the organisation and integrated
with all the other activities.
 The board reviews risks and identifies and monitors progress
of the risk management plans.
 • The board will determine which risks will be accepted which
cannot be managed
The board will generally delegate these
activities to a risk committee
Risk Awareness
Risk Monitoring
 Risk monitoring is a systematic way of
understanding the risks that an organisation faces
 Risk auditing assists the overall risk monitoring
activity (last step in the risk management process)
by providing an independent view of risks and
controls in an organisation.
 As with any audit situation, a fresh pair of eyes
may identify errors or omissions in the original risk
monitoring process.
 Following review, internal and external audit can
make recommendations to amend the risk
management system or controls as necessary.
Risk Management Strategies
Risk Avoidance and Retention
 Risk avoidance: the risk strategy by which the
organisation literally avoids a risk by not
undertaking the activity that gives rise to the
risk in the first place.
 Risk retention: risk strategy by which an
organisation retains that particular risk within
the organisation – This is a similar concept to
risk acceptance
Risk Reduction
 Risk can be reduced by diversifying into
operations in different areas.
 Poor performance in one area will be offset by
good performance in another area, so
diversification will reduce total risk.
 Diversification is based on the idea of ‘spreading
the risk’; the total risk should be reduced as the
portfolio of diversified businesses gets larger.
 Diversification works best where returns from
different businesses are negatively correlated
(i.e. move in different ways).
Transference
• Risk is transferred wholly or in part to a third
party, so that if an adverse event occurs, the
third party suffers all or most of the loss
• All businesses arrange a wide range of insurance
policies for protection against possible losses.

Chapter 8 Risk and The Risk Management Process

Uploaded by

Copyright:

Available Formats

Chapter 8 Risk and The Risk Management Process

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 8 Risk and The Risk Management Process

Uploaded by

Copyright:

Available Formats

Risk and the Risk Management Process

 Risks are the opportunities and dangers

You might also like