Risk Management Explained

Before discussing risk management we need tobills. Based on your income and your expenses they
understand what is 'risk'? A risk is 'uncertainty ofissue you a credit card. If they feel that you are at a
outcome'. When an action is taken, and thegreater risk they will cap the credit limit accordingly.
probability of the outcome is uncertain, it is called asInsurance companies take a risk when they sell
risk. There are risks involved in every action that isinsurance. For example, an insurance company sells
taken. Setting up a business is a risk, buying a housegeneral insurance. They have several sales agents
is a risk. The topic of risk management has diversifiedwho are selling insurance. Now, if the insurance
so much that from risk management of financialcompany finds out that eighty percent of the shops
institutes to software have all become specialisedand offices in a building have been insured by them.
fields. What is understood or practiced generally asThey will immediately 'spread' the risk. How they do it
risk management is explained below.is by getting underwriting companies to cover part of
1. Identification of a riskthe insurance. If the building catches fire, the
2. Working out the probability of risk occurringinsurance company plus the underwriters would bear
3. Determining the consequences of a risk occurringthe loss. In case the insurance company does not
4. Finding ways of reducing a riskspread the risk, they would have to pay the entire
5. Reducing the probability of a risk occurring.insurance and the company is likely to fold up in such
Before starting out on any venture, all types ofan event.
potential risks that can occur and tune into a realitySimilarly, a bank is under risk if they invest all their
are identified. Let's consider a simple example; if youcapital in a single venture. If the venture fails, the
go to cross a street, you expose yourself to the riskbank will collapse. In property, stocks, and any other
of being hit by a speeding car. If it's a crowdedbusiness, risk management plays a key role.
street with lots of traffic, the probability of thisIn factories and work places risk management teams
happening becomes even higher.evaluate the likelihood of disaster occurring. Then
Now if a speeding car hits you, the least that canthey suggest ways of reducing the possibility of that
happen to you is that you might sustain minor cutsrisk occurring. Making workers wear protective and
and bruises. The worst outcome would be you beingsafety gear is a means of risk management.
killed. Now, when you know what the consequencesThe gist of risk management is to try to reduce the
of taking a risk can be, you will find a way ofchances of a tragedy from occurring. Identifying
reducing the risk. How do you do that? In this casepossible risks and reducing the chances of its
you will look for the nearest pedestrian crossing andoccurrence. There are unknown risks that can occur
use it. In this way, you will be reducing the risk factorand are generally overlooked when doing risk
involved in crossing a busy street.management. Like an earthquake occurring in an area
Risk management in any project follows the samewhich has no history of earthquakes and is not on a
basic principles. When a credit card company issuesfault line. Such a risk would be left out of the scope
you a credit card, they first run a credibility check.of risk management.
They check to see if you will be able to repay your