What is Risk Management? Definition, Standards, Methods and Principles

Wikipedia of Finance - e-learning course on Risk Management Wikipedia Chapter - What is Risk Management? Definition, Standards, Methods and Principles

Risk Management Definition:

The process of identification, classification, assessment, and prioritization of risks is broadly defined as risk management.  Further it is pursued by synchronized and economical application of resources, not only to reduce, supervise, manage and improvise the likelihood and impact of untoward proceedings but also to capitalize the comprehension of opportunities. In one line if we’d have to define managing risk, we can say risk management is an effective tool that ensures ambiguity does not avert the enterprise from the business goals.

In financial world, basically there are two types of events an investor is likely to encounter the first one is called positive event, classified as opportunities while second one is negative event and can be classified as risks. Uncertainty in financial market like menaces from ventures’ collapse that can occur at any point of time or during any phase be it design, development, or production. Amongst these sources other sources that have the potential to cause risks are natural causes and disasters, events of uncertain or unpredictable root-cause, legal liabilities, accidents, credit risk, or a deliberate attack from an adversary.

Methods of Risk Management:

Normally, the methods used for risk management are performed in the following order. To initiate the process identification and characterization of menaces is required, and then assessment of the susceptibility of significant assets to specific menaces then comes the task of determining the risk i.e. the expected probability and consequences of specific types of attacks on specific assets, further when menaces are determined, management team works to identify ways to reduce those risks and ultimately prioritize risk reduction procedures based on a strategy.

Risk Management Standards:

Techniques, characterizations and goals differ extensively according to the context of risk management method. Considering the fact various risk management standards have been urbanized entailing the National Institute of Standards and Technology, the Project Management Institute, actuarial societies, and ISO standards to serve the purpose of project management, engineering, security,  financial portfolios, actuarial assessments, industrial processes, public health and safety etc.

Tactics practiced to control menaces (menaces or threats are defined as qualms or uncertainties with negative consequences) normally entail circumventing the menace, minimizing the negative consequence or possibility of the menace, disbursing all or part of the menaces to different party, and even maintaining some or all of the potential or actual effects of a particular menace, and the reverses for opportunities i.e. hesitant future states with advantages.

A few aspects of many of the risk management standards are also subjected to criticism owing to lack of any robust measurable improvement on risk, whereas the assurance in guesstimates and decisions seem to elevate. For example, it has been noticed that on an average out six, at-least one IT projects suffer cost overruns of about 200 per cent and over 70 per cent of schedule overruns.

Principles of Risk Management:

Following principles of risk management are identified by The International Organization for Standardization (ISO).  When a management team decides to perform a tangible risk assessment, the overall risk management procedure should cover the following target areas.

  • The entire process should create value – resources exhausted to alleviate risk are supposed to be less than the corollary of inaction.
  • Managing risk should be a fundamental part of organizational processes.
  • Risk management should also be a part of decision making process.
  • Managing risk should clearly address uncertainty and assumptions (that an individual or a company might face).
  • The process of risk management is supposed to be a systematic and structured one.
  • The overall drill of risk managing should be based on the best on hand information.
  • Risk management should be tailor-able – the process should be capable of being personalized with respect to a given purpose or function.
  • The process of risk management should take human factors into considerations.
  • The process of risk managing should be transparent and inclusive.
  • Risk managing should be iterative, dynamic and quick responsive to change.
  • Managing risk should be competent enough of continual improvement and enhancement.
  • It is essential for risk management’s process to be continually or periodically re-assessed – with change in time risks tend to vary and the process should be well equipped with data to check them.

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0 thoughts on “What is Risk Management? Definition, Standards, Methods and Principles”

  1. It’s difficult too find experienced people in this particular subject, but you sound like you know what you’re talking about! Thanks.

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