What is Risk Analysis? Definition, Examples, Methods, Techniques, Template

Risk Analysis Definition:

The branch of risk management that studies about the ambiguity of a given course of action is called risk analysis. The ambiguity of anticipated future capital cash flows streams, dissent of portfolio/stock returns, numerical analysis to resolve the likelihood of a project or a venture’s achievement or malfunction, and probable potential economic states. Risk analyst’s and forecasting professionals work hand in hand to reduce any negative effects likely to occur in future.

Almost every industry in every sector and every business necessitates at least some sort of risk analysis. Let’s take a risk analysis example of a commercial banks, their requirement of foreign hedge or monetary exchange exposure of oversees loans is supposed to be by the book. And their huge departmental stores ought to feature in the likelihood of minimized incomes owing to a global recession. Risk analysis enables professionals to identify, characterize and mitigate risks, but avoiding them entirely is not its cup of tea. Efficient risk research often entails mathematical and statistical software programs. Some books however opt for a slightly diverse technique and describe risk management as the ambient concept, on the other hand risk management is the constituent that seeks out to identify and characterize then further measure the risks and risk mitigation is formative as to what to do about the risks.

Risk Analysis Methods and Techniques:

Quantitative risk analysis, normally known as called, “probabilistic risk analysis or probabilistic risk assessment (PRA)”, Quantitative risk research refers to statistical evaluation of possibilities for the potential effects of risk (negative and positive both). Basically the analysis aims to explain the consequences in mathematical units such as rupees, time, or loss of human resources. This is one of the risk analysis technique or method which is widely followed. Probabilistic risk analysis aims to answer the following three questions on priority basis.

Question number one – “What can possibly go wrong? Simply, what can happen?” Following this question it answers the next one, “What are the chances will it happen, how likely is it?” Then the final question that QRA seeks to answer is “What if the particular were to occur, what consequences the clientele will suffer?”

Thus, risk R can be explained as a set of triplets, i.e. R= {<si, pi, ci>}, i=1, 2…, n, where “si” is situations “i”, pi is the possibility of situation “i,” “ci” are the impacts if scenario “i” happens, and “n” is the total number of situations. This type of analysis typically results in a probability distribution over the impacts.

Pseudo-Quantitative Risk Analysis:

Pseudo-quantitative risk analysis is the process of assigning numbers to the possibility and impacts for a risk event but it doesn’t construct a mathematical model of the risk as suggested by PRA. One of the globally accepted pseudo-quantitative methods is the, “risk matrix,” which categorizes the probability of a risk in one group and the impacts in another. The permutation of the probability and impact categories communicate to a given risk level, generally a color such as orange, yellow, red, and green. A risk matrix is termed as a pseudo-quantitative method at times owing to the categories that are determined from numbers. For example, the probability category Unlikely may correspond to a likelihood of occurrence between 0.1 and 0.3.

These pseudo-quantitative or scoring techniques have been criticized on a global scale, for violate the mathematical rules and are argued to rank the risks incorrectly. They have the manifestation of being precise but also provide a forged sense of security to those organizations that rely solely on them to manage risks. Undertaking a full QRA provides a more precise analysis and a better basis for making good risk management decisions than depending on pseudo-quantitative approaches alone.

Risk Analysis Template:

There is no specific format of risk analysis template for business, financial planning, banks, etc. But you can create your own risk analysis template based on three important steps.

Identifying Project Risk – For example: Hiring a contractor, buying chairs or computers, upgrading office furniture, etc.

Identifying Potential Risk – There are many types of treats to the project for example – Reputation Risk, Financial Risk, Operational Risk, Human Risk, Natural Calamities Risk, etc.

Estimating the level of Risk – This is a very tricky stage. Here you will need to define how often you are exposed to such kinds of risk, what are the probabilities of occurrence based on the countries outlook.

Conclusion:

In this e-learning chapter we have learned about risk analysis methods, techniques and approaches. Also we have seen how to build your own risk analysis template. hope this chapter would have sharpen your mind towards next level of thoughts. All the best for your further learning’s.