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Components of Risk Management

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Tue, 12 Sep 2017

1st the definition of risk:

Risk is simply a possible threat that may occur during a specific event or even in a normal day which may affect our lives in various ways by changing the ordinary routine in a dramatic turn of events whether it’s Damage, loss, liability there is always a chance of a possible risk that may happen (though odds may change by the surrounding Environment, situations and the nature of the risk) (BusinessDictionary.com, 2017)

Examples of risk:

1. Financial risk: The possibility that a certain project or business may not cover the costs and expenses that been spent on it or even cause loss of resources.

Examples of financial risk: (Investinganswers.com, 2017)

Economic Risk: is the possibility that Macroeconomic conditions like exchange rate, government economic Regime or political influences may affect the Economical state of an investment or an entire country

Political risk is divided into two types (Investopedia.com, 2017)
Macro and Micro:
A macro risk refers to adverse actions that will have an impact on all foreign businesses expropriation or insurrection. On the second hand we have Micro risk and it’s remotely different from macro and the difference is that a micro risk will affect a certain industrial field or business caused by corruption, prejudicial behavior against foreigner countries and their investments and usually will end up losing a lot of Money if they are unprepared for such turn of events. For example after Fidel Castro’s gained control over Cuba in 1959 hundred millions of dollars’ worth American Investments were expropriated by Castro’s government unfortunately most of these American businesses had no resources or alternative plans to retrieve their loss back.

Liquidity risk: the following situations will simplify the concept of liquidity risk

(BusinessDictionary.com, 2017)

Situation 1: not being able to fulfill the needs of depositors and borrowers due the lack of cash or cash equivalents.
Situation 2: sales of illiquid assets cheaper than their usual value.
Situation 3: illiquid assets will not be sold in the scheduled time planned due to the lack of customers.

2. Food industry Risk: The possibility that harm may occur due to a certain hazard affecting a certain magnitude.

3. Work place risk: The possibility that an injury may occur during work whether the job is risky or not.

2nd The Components of Risk: (Project-Management.com)

Risk has 3 components. These components should be taken separately one at a time in consideration while deciding how to manage a risk

  1. The event that could happen.
  2. The possibility that an event could happen.
  3. The effects and the results if the event happens.
    How to begin?
    Analyze the possible risks that might happen to your business, life etc. Most of the Risks could be divided in two: External and internal. Internal Risks: Business owners have various ways to control internal risks which happen from day to day represented in things like: Strategies, financials and employees. External risks: Such as disasters and compliance. These are hard to control, Analyze and prepare for however it could be done by a series of preparations.

The Plan: (Investinganswers.com, 2017)

Risk management plans guide you on your way to analyze the risk, find solutions and get ready to face that risk any given moment. Though this plan doesn’t describe the risk as a structure but the techniques of solving problems and facing these risks properly.

Step 1 identifying the possible risk: (Gov.uk, 2017)

First of all before taking any steps you should consider finding a group to think with about the possible risks. It’s always better to think in groups to cover all the corners of the topic. Think of what could be threatening your business and how would it affect you and reflect on your work. You should be taking time to analyze and determine what the risks around you are by covering all the surrounding issues and thinking of the true potential risk and categorizing it. Categorizing risks depends on the nature of your work and your surroundings. For example: if you’re running a factory you should consider the risk of having technical difficulties such as the fact that machines may stop functioning or even injuries may occur within your factory. These elements you can control by taking the right cautious steps. These are called internal risks such as we mentioned before. However, in cases of natural disasters like earthquakes, volcanoes, tsunamis etc., there is nothing much you can do about it and you may not have control over these external risk elements.

2nd step in our list here is prioritizing project risk: (Gov.uk, 2017)

And it’s simply determining how likely or unlikely the mentioned risks may occur and calculating the potential impact on the project may be minimal. For example: a huge storm could happen and cancel few flights. That’s a risk that unlikely to happen. For example: a meteor shower might hit a certain area on earth and that would cause the same effect as the previous example, but it’s still unlikely to happen or it doesn’t happen too often if I may say.

Probability scale: After determining the risk, prioritizing and categorizing them, it’s now time to put them on the probability scale or the possibility scale: Very unlikely, unlikely, possible, likely, most likely

After measuring how serious and likely the risk would happen, it’s now time to see how influential and impacting the risk is. Using the impact scale: which goes as following
Very Low, Low, moderate, high, very high

The techniques and the methods used to rank a risk applying probability scale and impact scale:

  1. Identifying the risk that is most likely to happen, rank it 5.
  2. Identify the risk that is the least likely to happen, rank it 1.
  3. Rank the other risks according to how likely they may occur.
  4. Apply the previous method on the impact scale.

Example no.1 flight:

Risk

snow storm

Probability

3

Impact

5

Priority

Actions

Example no.2 Flight:

Risk

Meteor shower

Probability

1

Impact

5

Priority

Actions

Calculating priority: Once the probability and impact have been determined, you can easily calculate the priority by multiplying its probability through its impact. By this method you should be able to reorder your risk list in order of your own priorities.

Example no.1 flight:

Risk

snow storm

Probability

3

Impact

5

Priority

15

Actions

Example no.2 Flight:

Risk

Meteor shower

Probability

1

Impact

5

Priority

5

Actions

As we mentioned earlier that each environment has its risks and each situation has a set of risks. This leads us to our next point.

Hazard maps: the definition of hazard maps: (Earthquake.usgs.gov, 2017)

A hazard map is a highlighted map spotting dangerous areas that affected or vulnerable to a certain hazard or risk such as volcanoes, earthquakes, tsunamis, landslides etc.. Hazard maps are created and used too often to expose the areas of high risk however hazard maps has various uses. For example: the one created by the U.S Geological survey which is used by American Insurance Agencies in order to maintain insurance covered citizens safe for living in hazardous areas. This leads us to a very important point which is event history.

Event history: The only purpose of event history is to record, analyze and explain why certain people are at higher risks than others. This can be done by a special sort of static methods depending on the matter which is discussed. The first single requirement to make an event history analysis is event history data.

The definition of event history: (members.home.nl/, 2017)

It’s simply a static or a series of events recorded by the date and time which happened to an individual or a series of individuals. For Example: an event history might be constructed by asking a series of question to a sample of people or making a survey which will report the dates of any past changes in marital status (for example). Risk appetite: A way to help and lead an organization system to approach risk and risk management.
The definition of Risk appetite: (theirm.com, 2017): It’s the amount of risk that a certain organization is able to tolerate and accept in the quest of its objectives and before the action is considered necessary. This done to reduce the risk since it works as a balance between the perks of creativity and the risk that change inevitably brings.

Levels of Risk appetite

Averse: Avoiding risk and uncertainty. Minimal: tendency to maximum safe options that is low on risk for a limited reward. Cautious: tendency to safe side options that have a minimal degree of risk and may have limited potential for a reward. Open: Willing to consider all options, the safe side part and the risky side as well and choose the one most likely to give better results. Hungry: eager to be innovative and willing to take the risks by choosing options with higher or better rewards despite the obvious risk, however the risk could be reduced by measuring the odds, though precise measurement isn’t always possible. By defining the risk appetite an organization can make a perfect balance between innovation and caution for better results and higher, safer profits. However if a risk occurred and it already happened we’ll need to use methods called Risk treatment.

The definition of risk treatment: (simplicable.com, 2017)

A risk treatment protocol or method which simply shows you how to manage a risk process all of its contents and treat it with various solutions.

  1. Avoidance: The first way to solve a problem is to avoid it and not needing to deal with it which in this case not taking the risk at all by avoiding its actions and staying out of its direction for a safe result.
  2. Reduction: You can always stay safe, always be prepared for the risk, for example wearing a life jacket when you go out for a swim, that way you will reduce the risk of drowning.
  3. Risk acceptance: Also known as risk retention which is simply choosing to take the risk instead of avoiding it.

How to assess the risk? (Gov.uk, 2017)
There are few things you need to know if you want to assess the risk.

1st: you need to identify the risks and the hazards such as we mentioned before. 2nd: you need to know who would get harmed by these hazards. 3rd: evaluate the risks. 4th: record your researches and studies about the risk. 5th: review your assessment to make sure that everything is going as planned.

Risk management process: 1st you’d need to identify the hazards as usual and make sure that you studied all the sides of these hazards. 2nd risk identification you’d want to be fully aware of the risk and the hazards caused by it. For example: Hazard: worn out wires on electric items. Risk:worker might get electrocuted. 3rd risk assessment as it’s really importantto evaluate the odds of an injury occurring along with the possible consequences. That’s why risk assessment is based on two factors.The possible impact of any injury caused by a hazard and the possibility that the injury will happen, a risk matrix should be used in this type of situations.

Risk Matrix: (Brighthub Project Management, 2017): Is a matrix used during the risk assessment to categorize the various levels of risk and the amount of harm that can be predicted to happen during a specific event an accident. Forexample, the level of risk could be measured and calculated as the result of possibility that harm could occur multiplied by the severity of that harm. Catastrophic: Numerous Deaths.Critical: 1 Death or Several Severe Injuries. Marginal: 1 Severe Injury or several Minor Injuries. Negligible: 1 Minor Injury

Negligible

Marginal

Critical

Catastrophic

Certain

High

High

Extreme

Extreme

Likely

Moderate

High

High

Extreme

Possible

Low

Moderate

High

Extreme

Unlikely

Low

Low

Moderate

Extreme

Rare

Low

Low

Moderate

High

4th risk control (riskcontrolstrategies.com, 2017)

Urgent actions must be taken for risk assessed as critical or high risk, the actions include: Instructions for immediate cessation of Activity, Isolation of the hazard, Prioritizing and immediate reacts to the hazard along with few improvements that can be done quickly, Training workers to be able to deal with the hazard properly and finally Daily check on the hazard to prevent any catastrophic losses.

5th branch diagrams (risk diagrams): (smartdraw.com, 2017)

This analysis method is often used in safety engineering to figure out and determine how system can break or fail to analyze how to reduce risk or determine rates and statics of safety accidents. And it’s commonly used nuclear powers and chemicals processing. Fault tree analysis can be used to understand the concept to the risk event. First: Show the guidelines with the input system safety. Second: Prioritize the circumstances leading to the hazard event. Third: Monitor and insure safer performance. Fourth: Control over resources. Fifth: Assist building a system and a matrix. Sixth: Diagnosis and identifying and avoid the causes of the top event.

6th Risk register: (Brighthub Project Management, 2017)

  1. National risks register: Is a national security strategy was first published by the government back in 2008. Aiming to provide advices on how people and business can stay safe by preparing themselves for civil emergencies, there was another update in January 2012 and it was a fulfilling update to the 2008’s register. Such register contained all the governments’ likelihood and potential emergencies risks made by several emergencies and hazards according to natural and industrial occurring hazards that may affect the United Kingdom.

2. Local risk Register: Whatever risk we face daily, it depends on where we live, how we live and the nature of environment around us. Flooding for example will be limited to certain areas of the country, while the odds of an industrial risk will depend on the type of industry and the place; each area has its own set of risks. For example: living by the coast could put you at the risk of a tsunami or a flood. Each area is special when it comes to risks. Therefore, the government provides guidance and instructions on how to act or what to do during this kind of events. It also shows how to overcome and how to treat these risks and how to be prepared before any risk hits suddenly.

7th Dynamic Risk Assessment (KPMG, 2017): DRA was developed by KPMG team: A team of scientists, mathematicians and economists. It’s considered a huge step forward in the risk Assessment field which depends on theories, sophisticated algorithms, mathematics and advanced well processed data to identify and analyze risk in a 4th dimensional view. This allows professionals to see where risk can be considered critical or even spread contagion. The threat is measured and calculated before the event to prevent its occurring.

References:

BusinessDictionary.com. (2017). When was the last time you said this?. [online] Available at: http://www.businessdictionary.com/definition/risk.html [Accessed 22 Mar. 2017].

KPMG. (2017). Dynamic Risk Assessment. [online] Available at: https://home.kpmg.com/xx/en/home/services/audit/dynamic-risk-assessment.html [Accessed 22 Mar. 2017].

Imagineeducation.com.au. (2017). Imagine Education Australia. [online] Available at: http://www.imagineeducation.com.au/files/CHC30113/6_Steps_to_Risk_Manageme [Accessed 22 Mar. 2017].

Project-Management.com. (2017). What are the Components of Risk?. [online] Available at: https://project-management.com/what-are-the-components-of-risk/ [Accessed 22 Mar. 2017].

: Spacey, J. (2017). 5 Types of Risk Treatment. [online] Simplicable. Available at: http://simplicable.com/new/risk-treatment [Accessed 22 Mar. 2017].

Gov.uk. (2017). Risk assessment: how the risk of emergencies in the UK is assessed – GOV.UK. [online] Available at: https://www.gov.uk/guidance/risk-assessment-how-the-risk-of-emergencies-in-the-uk-is-assessed [Accessed 22 Mar. 2017].

Earthquake.usgs.gov. (2017). Introduction to the National Seismic Hazard Maps. [online] Available at: https://earthquake.usgs.gov/hazards/learn/ [Accessed 22 Mar. 2017].

Project-Management.com. (2017). What are the Components of Risk?. [online] Available at: https://project-management.com/what-are-the-components-of-risk/ [Accessed 22 Mar. 2017].

KPMG. (2017). Dynamic Risk Assessment. [online] Available at: https://home.kpmg.com/xx/en/home/services/audit/dynamic-risk-assessment.html [Accessed 22 Mar. 2017].

Brighthub Project Management. (2017). What Is a Risk Register? Explanation & Free Template. [online] Available at: http://www.brighthubpm.com/risk-management/3247-creating-a-risk-register-a-free-excel-template/ [Accessed 22 Mar. 2017].

Smartdraw.com. (2017). Fault Tree Diagram – What is a Fault Tree and Fault Tree Analysis?. [online] Available at: https://www.smartdraw.com/fault-tree/ [Accessed 22 Mar. 2017].

Theirm.org. (2017). Risk appetite and tolerance. [online] Available at: https://www.theirm.org/knowledge-and-resources/thought-leadership/risk-appetite-and-tolerance/ [Accessed 22 Mar. 2017].

Risk Control Strategies. (2017). Risk Control Strategies: Threat & Security Solutions. [online] Available at: https://www.riskcontrolstrategies.com/ [Accessed 22 Mar. 2017].


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