Risk Management in an Organization

Introduction

In this paper we are doing a research on the topic ‘risk management in organization’.

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Risk management as a subject and as a function of business management is relatively new concept. Therefore the purpose of this paper is to explore some of the basic concepts of risk. In this paper we have tried to define risk, uncertainty and risk management. The term risk may be defined in many ways but in this context of risk management it is closely associated with uncertain events. The main purpose of the paper is to define the term risk and uncertainty and discuss the relationship between risk and uncertainty. We have also tried to classify risk in different categories; several ways of handling risk are also discussed. Apart from that, we have also tried to analyzed what is risk management its objectives, its scope and its importance in an organization.

Explanation

In this paper we are dealing with the topic of ‘risk management in the organization’. Risk management as a subject and as a function of business management is relatively new concept. Before going into the topic I would like to talk about what is risk because until and unless you understand what is risk we cannot understand what is risk management.

The term ‘risk’ can be defined as the condition in which there is a possibility of deviation from the desired outcome that is expected. As far as uncertainty is concerned we know that the whole life is surrounded by uncertainty and nothing is certain in life. So the term ‘uncertainty’ may be defined as a psychological reaction to the absence of knowledge about the future.

Relationship between risk and uncertainty

The word risk cannot be described as a single definition and in many different situations, it is described in many ways. In the context of risk management the most acceptable definition is a phenomena closely associated with uncertain events. Uncertain events fall into two main categories. There are those for which the probability of occurrence is calculable either on a priori grounds or through the statistical analysis of a series of similar events that have occurred in the past. The remainder do not lend themselves to such measurement either because their occurrence follows no discernible pattern or because they are unique events.

Types of risk

Risk can be classified into several distinctive categories. The most important categories are:

  1. pure and speculative risk
  2. fundamental and particular risk
  3. dynamic and static risk

Ways of handling risk

Several methods are used to handle risk in our day-to-day life. They are avoidance, risk reduction, risk retention, combination, transfer, hedging and research.

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Risk management

The term management can be defined in terms of organizing of activities and controlling the use of resources in such a manner as to achieve some desired objectives. Therefore in wide terms we can say that risk management is concerned with the planning, arranging and controlling of activities and resources in order to minimize the impact of uncertain events.

Objective of risk management

Pre loss

It basically deals with the situation before the loss occurs:

  • The first objective means that the firm should prepare for potential losses in the most economical way.
  • The second objective is the reduction of anxiety.
  • The final objective is to meet any legal obligations.

Post loss

Risk management also has certain objectives after a loss occurs. The most important post loss objective is survival of the firm. Secondly the firm has to remain operational. The third objective is to maintain the stability of the firm. The fourth post loss objective is continued growth of the firm. Finally the last objective is that of social responsibility that means to minimize the effects of loss on other person and on the society.

Risk management in organization

Regardless of whether responsibilities for the control and financing of the different types of risk to which an organization may be exposed are placed largely in the hands of one member of the top management team or are distributed throughout that team , it is highly desirable that an overall corporate risk philosophy should be agreed and a consistent set of policies adopted for the handling of all risks. The major factor entering into the determination of tolerable loss limits is the organization’s financial position. Apart from that the other factor which affects the corporate risk handling decisions is the corporate attitude to risk which will be determined by the attitudes of the individuals who collectively comprise the decision making body. Corporate risk attitude are partially a reflection of corporate objectives.

The job of risk management can be broken down into three elements which each other in a logical sequence. They are:

Risk analysis

  • Identification
  • Evaluation

Risk control

  • Reduction
  • Avoidance

Risk financing

  • Retain
  • Transfer

Risk analysis

The first step in the process is to analyze the risks to which an organization may be exposed. It has got two prime elements:

Identification of risk

It requires knowledge of organization, the market in which it operates, the legal, social, economic, political, and climatic environment in which it does its business, its financial strengths, and weaknesses, its vulnerability to unplanned losses, the manufacturing processes, and the management systems and the business mechanism by which it operates. Risk identification provides the foundation for risk management.

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Risk evaluation

It breaks down into two parts- the assessment of:

  • the probability of a loss occurring
  • its severity

Risk control

Risk control covers all those measures aimed at avoiding, eliminating or reducing the chances of loss-producing events occurring, or limiting the severity of the losses that do happen. Here, one is seeking to change the conditions that bring about loss-producing events or increase their severity.

Risk financing

Here one is concerned with the manner in which the risks remaining after the risk control measures are implemented and financed. It has to be recognized that in the long run an organization will have to pay for its own losses. Therefore, the primary objective of risk financing is to spread more evenly over time the cost of risks in order to reduce the financial strain and possible insolvency which the random occurrence of large losses may cause. The secondary objective is to minimize risks costs. An organization can finance its risks cost by three ways. They are:

  • By operating costs.
  • Either by buying insurance or by building contingency fund.
  • Or they can be financed by taking loans.

Conclusion

Risk management is a scientific approach in dealing with pure risks by anticipating possible accidental losses, designing, and implementing financial impact of the loss. Risk management embraces all efforts taken to minimize the impact of uncertain events. It is broader in its treatment of risk, using all forms of risk control. It also approaches the problem of risk from the standpoint of a person or an organization exposed to risk.

The risks to which an organization is exposed to which an organization is exposed extend to the uncertainties associated with every type of activity and differ in the nature of their potential outcomes. Risk management in organization has a huge impact on the functioning of an organization because until and unless the organization analyses the risk they can’t plan to control the risk and if that is not done then it won’t be a viable situation for an organization to finance it. Therefore, all the three processes are interrelated and proper planning and research is required and to take effective decisions now the role of risk managers have increased immensely.

References

www.riskworld.com

www.rmf.harvard.edu

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