CHAPTER 2: Risk Management

2.1.Risk management defined

2.2.Objectives of risk management
2.3.Steps in risk management process
2.3.1.Risk identification
2.3.2.Risk measurement
2.3.3.Selecting the appropriate tools of risk
management
2.3.4.Risk administration

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 2.1.Risk management defined

Risk management

Risk management is a scientific approach to dealing

with pure risks by anticipating possible
accidental losses and designing and
implementing procedures that minimize the
occurrence of loss or the financial impact of the
losses that do occur
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2.2.Objectives of risk management

 What are the fundamental goals of an

organization?
 The risk management program needs to
support the goals of the organization.

 The objectives of risk management

can be broken into two components

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a) Pre-loss Objectives
 Social Responsibility:
 Improve public image “good corporate
citizen” – high value on human safety.
 Externally imposed obligations:
 Set out in statute, in contract or simply as
a commitment to a customer (making sure
a client complies is a proactive step).

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CO,N
 “Peace of Mind”:
 Each organization has a different tolerance level

for uncertainty (threshold beyond which they

will not survive financially).
 Cost of risk:
 Operate economically – all cost associated with

managing pure risk are known as “cost of risk”.

Budget for risk management must compete with
budgets for other organizational objectives.

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b)Post-loss Objectives
 Social Responsibility:
 Consider employees and communities
 Survival:
 As a going concern. Avoid bankruptcy or liquidation.
 Operational Continuity:
 Is the business indispensable? Will you lose market share?
 Higher costs
 Reciprocal agreements
 Maintain stable earnings:
 Cut Expenses?
 Sustain Growth

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Conflicts Among Objectives
 Economy vs. Continuing Operations
 Objectives can conflict!

 Priorities must be examined to develop a plan that

is consistent with overall goals.

 The plan must be analyzed comparing costs to

benefits.
 Social Responsibility vs. Continuing Operations
 Social responsibility rarely has immediate benefit –

survival is priority.
 Compromise possible?

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 2.3.Steps in risk management process

2.3.1.Risk identification
How can you identify the causes and effects of the risks in
your company? What can happen?
In this first stage of the methodology, the
possible specific causes of business risks are
identified in a systematic manner, together
with the range and possible effects thereof,
which an entrepreneur must confront.

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 continues
The proper identification of risks calls for a
detailed knowledge of the company, of the
market in which it operates, of the legal, social,
political and cultural environment in which it is
set. Risk identification must be systematic and
begin by identifying the key objectives of
success and the threats that could upset the
achievement of these objectives.

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 continues
 The identification of the risk must be
systematic and should begin by defining the
entrepreneur’s objectives, analyzing the
factors that are key to the business in order
to achieve success and reviewing what the
weaknesses of the project are and the
threats it has to deal with.

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 continues
 For this purpose, it is advisable to make
a SWOT analysis (Strengths,
Weaknesses, Opportunities and
Threats); particularly the weak points
and the threats will offer a view of the
risks facing the entrepreneur.

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 Risk management process
(1) Determination of objectives
(2) Identification of risks
(3) Evaluation of risks
(4) Considering alternatives and selecting the
risk treatment device
(5) Implementing the decision
(6) Evaluation and review
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 2.3.2.Risk measurement

 Risk measures are

statistical measures that are historical
predictors of investment risk and volatility,
and they are also major components in
modern portfolio theory (MPT). MPT is a
standard financial and academic methodology
for assessing the performance of a stock or a
stock fund as compared to its benchmark
index.
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2.3.3.Selecting the appropriate tools of risk
management

Include two broad approaches:

(1) Risk control focuses on minimizing the
risk of loss
A. Risk avoidance
B. Risk reduction: loss prevention & loss
control
(2) Risk financing focuses on finding
funds to meet losses
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2.3.4.Risk administration
 What is Risk Management?
 Good management practice
 Process steps that enable improvement
in decision making
 A logical and systematic approach
 Identifying opportunities
 Avoiding or minimising losses
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 Risk Management is the name given
to a logical and systematic method
of identifying, analyzing, treating
and monitoring the risks involved in
any activity or process.

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 Risk Management is a methodology
that helps managers make best use
of their available resources

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Who uses Risk Management?

Risk Management practices are widely

used in public and the private
sectors, covering a wide range of
activities or operations.

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 Effective Risk Management
is a recognized and valued skill.
 Educational institutions have formal study
courses and award degrees in Risk
Management.
 The Risk Management process is well
established. (International RM process
standards.)
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 Risk Management is
now an integral part of business
planning.

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 How is Risk Management
used?

 The Risk Management process steps are a

generic guide for
any organization, regardless of the
type of business, activity or function
 There are 7 steps in the RM
process

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The basic process steps
are:
 Establish the context
 Identify the risks
 Analyse the risks
 Evaluate the risks
 Treat the risks
 Communicate & consult
 Monitor and review
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Establish the context
The strategic and organisational
context in which risk management will
take place.
For example, the nature of your
business, the risks inherent in your
business and your priorities.

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Identify the risks

Defining types of risk, for instance,

‘Strategic’ risks to the goals and
objectives of the organisation.
• Identifying the stakeholders, (i.e.,who
is involved or affected).
• Past events, future developments.

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Analyse the risks

How likely is the risk event to happen?

(Probability and frequency?)
What would be the impact, cost or
consequences of that event occurring?
(Economic, political, social?)

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Evaluate the risks

Rank the risks according to

management priorities, by risk
category and rated by likelihood and
possible cost or consequence.
Determine inherent levels of risk.

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 Treat the risks

Develop and implement a plan with specific

counter-measures to address the identified
risks.
Consider:
• Priorities (Strategic and operational)
• Resources (human, financial and technical)
• Risk acceptance, (i.e., low risks)
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Document your risk management plan
and describe the reasons behind
selecting the risk and for the
treatment chosen.
Record allocated responsibilities,
monitoring or evaluation processes, and
assumptions on residual risk.

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 Monitor and review

In identifying, prioritizing and treating

risks, organizations make assumptions and
decisions based on situations that are
subject to change, (e.g., the business
environment, trading patterns, or
government policies).

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Risk Managers must monitor activities
and processes to determine the
accuracy of planning assumptions and
the effectiveness of the measures
taken to treat the risk.
Methods can include data evaluation,
audit, compliance measurement.

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 Risk Management in Customs

Customs administrations have turned

increasingly to Risk Management as an
effective means of meeting national
objectives.
Administrations provide facilitation while
maintaining control over the
international movement of goods and
persons.

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International Organizations encourage and
support the adoption of modern Customs
control techniques, using Risk Management
principles., e.g.,

WTO/Kyoto Convention.


APEC Sub-Committee on Customs


Procedures.

Transport Industry representative bodies.



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 The process helps Administrations
focus on priorities and in decisions
on deploying limited resources to
deal with the highest risks.

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