Anticipating and controlling risks
Since the end of the 1990s, financial crises have followed one another at such a pace that it is difficult to remember a time when we were not entering or leaving a crisis. Whether it is subprime, European sovereigns, Lehman Brothers, Enron or Barings, the serious risk of systemic contagion is always present.
Risk is the potential for loss but cannot be separated from opportunities for growth and profit. Risk assessment must be a study of both opportunities and threats.
Risk Management refers to the management of risk within a company or organization. As everyone knows, risk is a driving force in a company and without risk taking, it is impossible for a company to make money. Therefore, risk management should not be confused with risk-taking. Risk-taking is essential.
Risk Management refers to the management of risks and encompasses the multiple actions related to the detection of risks, their impacts and their probabilities of occurrence, and the treatment chosen by the risk department to deal with them.
The Risk Management process
A process is a series of actions to achieve an objective. These actions can take different forms, but they are generally driven by a company's strategy.
An important objective of the risk management process is to help managers deal with the uncertainty of running the business and to identify the threats and opportunities facing their company.
One of the main functions of risk management is to find the right balance between risk and return. Risk management is about the company selecting the appropriate type and level of risk.
Most business decisions involve a sacrifice of current resources for uncertain future returns. At the heart of the management process is the ability to make forward-looking choices about risk versus expected profit and to evaluate performance.
To develop a risk management metric, it is usual to follow a process consisting of the following five steps:
- Step 1 – Establish risk objectives: what is usually called "Risk Appetite
- Step 2 – Detect, identify and quantify risk exposures
- Step 3 – Evaluate and prioritize risks. Determine the collective effects of risk exposures and conduct a cost-benefit analysis of risk transfer methods
- Step 4 – Develop a risk response and mitigation strategy
- Step 5 – Evaluate performance and modify the risk mitigation strategy if necessary