What Is Risk Management: Definition, Strategies, And Process
Risk is an omnipresent, unavoidable reality overarching all business sectors. As a business owner or executive, you’re probably intimately familiar not only with the concept of risk but also with its threatening aftermath. Luckily, risk management has evolved over the past decades, developing more sophisticated strategies to mitigate and even avoid risk altogether.
In this article, we’ll help you fully assimilate the concept of risk management and understand how the insurance and risk management process unfolds. Subsequently, we’ll explain how Axxima’s consultants and actuaries can help you get through even the most threatening challenges.
This way, you’ll have all the knowledge you need to address the threats your business faces, no matter what these threats might be.
What is risk management?
Risk management is the practice of proactively managing individual and corporate risks to reduce threats to a minimum and maximize success. According to Corporate Finance Institute, risk management involves “the identification, analysis, and response to risk factors that form part of the life of a business.”
The sources of risks stem from various sources such as financial, legal, management, cyber security, data, or even accidents and natural disasters. With the advent of the digital age, the threats have only multiplied, bringing new challenges such as intellectual property and proprietary data protection into focus.
Risk transfer (insurance) is one of the most common responses in risk management, offering compensation for specified loss or damage in return for the payment of a premium. In essence, insurance and risk management anticipate the worst-case scenarios, providing a safety net. However, there’s more to managing risks than insurance and, if you want to have an unshakable strategy, your business must tackle the challenge from a holistic perspective.
But how can you put in place an unassailable risk management approach? For that, you must understand why risk management is of utter importance and learn more about the strategies you can implement to keep your business out of harm’s way.
Why is risk management crucial for any organization
Every business, organization, or investment involves some sort of risk and understanding the trade-offs is essential to attaining your desired returns.
Make no mistake about it: considering potential risks is not an option but a mandatory business endeavour to protect your investments and save money. Faulty risk management can have severe consequences, leaving organizations vulnerable to disasters and lacking efficient strategies to handle crises.
According to Forbes, the volatility of the business environment will only increase. And, while it’s true that 2020 has made instability the new norm, the incredibly fast pace of change is nothing new. Matthew Bishop, an Economist editor, predicted in 2015 that “in the rest of our lifetimes the pace of change will never again be as slow as it is today.”
As we all know, all change comes with new threats, making risk management more critical than ever.
The types of risk your business faces
There are several types of risks your business faces at any time during its development. However, while certain risks are more present in the lives of your organization, others might catch you off-guard. To avoid such scenarios from occurring, insurance and risk management are mandatory precautions.
That being said, knowing the main types of risks your business might encounter will further help you prepare. Depending on the industry in which you operate, specific threats will appear and should be carefully considered. Our team has some of the best insurance consultants and actuaries in Canada, ready to help you identify all the possible risks that threaten your business.
Risk management and control strategies
Before implementing your risk management process, it’s advisable that you understand the wide range of control strategies you have at hand. Depending on the industry in which you operate, the risks you face will differ, and this will lead you towards different strategies. Here are the four most common risk control strategies you can implement.
Risk avoidance strategies refer to those courses of action a business can take to eliminate risk completely. This type of control strategy can be implemented by either finding alternative options or giving up particular activities assessed as risky.
While this risk management strategy ensures businesses will be free of risk, it can deprive them of essential opportunities if used excessively. Remember that all businesses and activities involve a certain degree of risk and that to profit from any endeavor, you must also be ready to face the downsides.
2. Risk Transfer
Risk transfer involves shifting a particular risk from one liable party to another with the goal of minimizing potential loss. This control approach uses techniques such as insurance, hedging, and contractual agreements.
In the case of contracts, risk transfer happens through indemnification clauses that state that the opposing party will compensate for potential losses. A particular case of risk transfer is risk-sharing, which requires the transference of individual risk to a group.
For most businesses, insurance and risk management go hand in hand, making risk transfer the preferred solution by executives. How much should you really transfer and when do you lose the benefit of risk transfer are questions the actuaries at Axxima can help you assess and quantify.
3. Risk mitigation
Risk mitigation refers to those risk management strategies meant to lessen the negative impact of a specific threat. Thus, the risk is mitigated by implementing actions that aim to reduce the negative consequences. In this case, the risk cannot be fully eliminated and its unavoidable consequences need to be addressed directly.
In general, risk mitigation is the main course of action when the assessed risks are unavoidable and cannot be tackled through risk transfer or risk avoidance. For example, in cyber insurance, risk mitigation with double factor authentication is becoming the norm. You may actually not be able to procure a risk transfer alternative unless some risk mitigations measures that lessen the risk are in place.
4. Informed acceptance/risk retaining
In specific cases, when the risks involved are small or don’t have the capability of causing too much harm, business can opt to retain the risk. This course of action is a conscious strategy that acknowledges and accepts small risks without implementing any risk transfer or risk mitigation plans.
Usually, this decision is taken based on economic reasoning, when the expense to mitigate or transfer a risk would exceed the consequence of the risk.
The steps of the risk management process
The most successful companies have developed on-going risk management processes and consider them an integral part of their culture. To increase the likelihood of achieving your business objectives, you also need to implement a process-oriented approach to risk management. To do that, you have to routinely follow a series of five steps that will help you assess, mitigate, and even avoid risk.
In essence, the steps you need to follow are:
1. Identify the risks
Any risk management process begins with a research phase. At this stage, the risk management team must carefully look at both the internal and external aspects of your business.
What types of risks threaten you from inside your organization, and what threats can arise within your industry? At Axxima, we leave no stone unturned and strive to understand every detail about your business to identify all the risks that might arise.
2. Evaluate the risks and assess the likelihood of them occurring
Not all risks are created the same. Some might seem harmless yet have devastating consequences, while others might appear threatening, only less probable to occur.
Once the risks have been identified, we rank them, considering the consequence and probability of each happening. With the ranking in place, we then consider your business objectives to understand what we must prioritize to achieve your goals.
3. Thoroughly examine solutions
Risks can be managed in a number of different ways, but our goal at Axxima is to find the best solution that balances effectiveness with affordability.
From risk control to risk transfer and risk acceptance, we assess various risk strategies to discover the ones that best fit your business and objectives. In addition, our actuaries will assist in determining the significance of each risk and provide clarity to clients to achieve their objectives.
What might work for a specific company might prove ineffective or too costly for your needs, so never assume the most used approaches are necessarily the best. Make sure that whoever is in charge of your risk management process is directly connected to the realities and environment of your business.
4. Implement solutions such as risk transfer
Once you and your risk team have assessed all possible threats and ranked them according to your objectives, it’s time to implement the systems to manage them.
Whether you have decided to accept, transfer, reduce, or eliminate the risks, our actuaries and insurance consultants will know how to help you access the required solutions.
5. Monitor the effectiveness of the implemented solutions
The risk management process doesn’t end with the implementation of your preferred solutions. As any process aiming to be effective and sustainable, risk management also needs to be monitored and measured. Only by keeping an eye on the results will you be able to assess the benefits of your insurance and risk management solutions.
To make sure you thoroughly tackle each step from the risk management process, you should contact a team of insurance and risk management specialists that are using an integrated approach along side a team of trusted actuaries in Canada. You might want to go over Axxima’s portfolio and list of services.
Your risk management cannot wait
No business is a stranger to risk. Today’s volatile environment and content unpredictability make risk management more necessary than ever. Not only that, but they make it a pressing issue that you, as a business executive, must be able to be fluent in.
Our team of specialists speak your language and know how to turn complex concepts into digestible information. If you want to shelter your business from the numerous risks that are bound to appear, reach out to Axxima today.
We’re committed to helping you understand our process through and through. Your business’ future cannot wait.