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Nature of Risk Management
Nature of Risk Management
Nature of Risk Management
Risk management aims at controlling the risk exposure of a firm. It is a rational approach towards controlling the Pure Risk to which an organization or an individual is exposed to. Risk management function can be groups with other management function such as Financial Management, Human Resource Management, etc An overview of different risks will help us to understand the nature of risk management. Organization and individual are exposed to a wide array of risk in their day to day operations, such as: Fire risk Risk of theft Loss of customer Delay in delivery of raw materials
IX. X.
Breakdown of machinery Accident Bad debts Change in industrial policy whenever the government changes Changes in financial market Changes in taxation etc. The perspective of risk management varies from one individual to another individual. Organization have their own views on risk. Many scholars and practitioners agree that risk management is an evolving science while a distinct minority feels that it is going to disappear in the years to come. In between there are many views on the nature of risk management.
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a. b. c. d.
e. f.
DETERMINATION OF OBJECTIVES
It is very important for an organization to identify the objectives of the risk management function. This includes the expectations that the organization has from the risk manager. The efficiency of the risk management may be seriously hampered if its objectives are not clearly specified. The clear delineation of the risk management process as a holistic approach rather than isolated individual problems to be dealt with. In order to ascertain the risk management objective of the organization, it is very important to link the priorities, goals and objective of risk management with that of the organization as it is essential for the risk management program to protect the organization from various exposures.
DETERMINATION OF OBJECTIVES
Exp: the organization would like to protect itself from running out of cash or becoming insolvent, or from a lock out. Moreover the organization would like to ensure safety for its workers. The would like to control its cost, have good understanding and terms with its shareholder( suppliers, dealers, customer, retailers, etc) and fulfill its social obligation. Thus, there are varies objectives of risk management, which the organization would like to meet. These objectives may be classified into two broad categories. They are: Post loss objectives Pre loss objectives
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survival of the organization Perpetuity of the organizations operation Steady flow of income Social obligation
IDENTIFICATION OF RISK
The second objective of the risk management process is to identify the potential risk to which the organization can be exposed to. Therefore, the risk manager has to analyze varies system of the organization in detail and identify the maximum possible risk expose of the firm. The risk manager usually undertakes a systematic study of identifying the potential risks. A few other methods used in general are check list, questionnaire, flowchart, financial statement analysis and close examination of company operations. It is important for the risk managers to have clear understanding of the various processes of the organization and orient their thinking towards these processes. They should have in-depth knowledge about the aims and objectives of organization as well as specific characteristic of the organization which distinguishes it from others. The past organization. Discussion with department officials concerned can help him assess the current operations and activities. A brief description of techniques applied by risk managers to identify organizational risk is given below:
IDENTIFICATION OF RISK
Risk Analysis Questionnaire Checklist Of Exposures Insurance Policy Checklist Flow Charts Analysis Of Financial Statements Other Records Of The Company Inspection Discussion Combination Approach