risk management and various risk handling techniques

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MEANING

STEPS

TECHNIQUES

Risk management is the process of identifying, assessing and controlling threats to an organization's capital and earnings

These threats, or risks, could stem from a widevariety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters

IDENTIFICATION Of SOURCES Of RISK :The company identifies and defines potential risks that may negatively influence a specific company process or project.

MEASUREMENT OF RISK : Once specific types of risk are identified, the company then determines the odds of it occurring, as well as its consequences. The goal of the analysis is to further understand each specific instance of risk, and how it could influence the company's projects and objectives.

TREATMENT OF risk : decide what risks may be retained and what will be transferred to others.

Selection of suitable method : such as avoiding, prevention, transferring , reduction etc

Implementing the selected method : look for suitable method

consider various factors like periodical premium, financial condition, amount of loss require proper attention etc

Evaluation : feed back process is evaluation of result of selected method.

done after certain interval

corrective actions must be taken to eliminate the bad result of implementation.

Avoiding risk : If your efforts at avoiding the loss have been successful, then there is a 0% probability that you’ll suffer a loss

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Loss reduction is a technique that not only accepts risk, but accepts the fact that loss might occur as a result of the risk. This technique will seek to minimize the loss in the event of some type of threat

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if something catastrophic occurs at one location, the impact to the business is limited to the assets only at that location.

On the other hand, if all assets were at that location, then the business would face a much more serious challenge

FOR EXAMPLE : a company utilizes a geographically diversified workforce.

Duplication is a risk control technique that essentially involves the creation of a backup plan

FOR EXAMPLE: A failure with an information systems server shouldn’t bring the whole business to a halt. Instead, a backup or fail-over server should be readily available for access in the event that the primary server fails.

Diversification is a risk control technique that allocates business resources to create multiple lines of business that offer a variety of products and/or services in different industries.

With diversification, a significant revenue loss from one line of business will not cause irreparable harm to the company’s bottom line.

As risk is unavoidable to the full extent therefore we must assume some risk

Create contingency reserves or funds to meet such losses

(a) hedging : shifting of the existing risk incurred in the cash or spot market by entering into another contract in the future market.

Involves two transactions simultaneously one in the spot market and the other in the future market

(b) sub contracting :the original contractor may shift the most of his risk to other contractor by entering onto sub contract with them for the work contracted for.

(c) Surety bond : third party steps into the shoes of the person who has given surety bond if the main person fails to meet the liability

(d) Limited company : total failure of a business is divided among a large number of members of the company

The unavoidable risk may be transferred to an insurance company by purchasing appropriate policy.