Risk Management Flashcards
Risk management
Risk management refers to the practise of identifying potential risks in advance, analysing them and taking precautionary steps to minimise a firm’s exposure to the risk.
Types of risk facing businesses
Natural disasters
Employee error
Equipment failure
Product failures
Economic factors
Legal challenges
Public relations failure
Supply problems
Probability of Risk
All business activty involves an element of risk.
It is how a business manages their exposure to risk that matters
Some risks are quite easy to manage and it is possible to calculate the impact of the risk upon a firm. This is known as a quantifiable risk
Risk assessment Matrix
Probability/Impact Extremely Unlikely. Likely. Extremely likely
Not critical 1. 2. 3
Significant. 2. 4. 6
Fundamental to business. 3. 6. 9
Operations
Impacts x probability = Risk Score
Quantifiable risks
Quantifiable risks can be planned for and measures put in place to minimise their impact upon a business
When a risk can be measured its is usually possible to take out insurance to ensure that a business can continue to operate even if the risk actually happens
ISO 31000
Using ISO 31000 can help firms to improve their identification of risk and effectively allocate resources for its management, so helping them to achieve their objectives.
Provides businesses with a series of guidelines that they can follow to help reduce and manage exposure
As it is not compulsory firms can choose to apply it but it does not offer a sound framework for risk management.
Risk assessment methods
Carry out risk assessments
Vulnerability mapping of risk.
Disruption |
Probability |
|
|_______________________
Consequences
Preventive measures of firms
Implementing preventative polices within a business can have minimise a firm’s exposure to risk. Such policies cannot be guaranteed to remove the risk entirely but they help to minimise its impact.
Water Sprinklers
Back-up IT systems
Staff Training
Insurable Risks
An insurable risk is a risk that meets the ideal criteria for efficient insurance. It is not however, so big or catastrophic that an insurance company is not able to pay out upon a claim.
For a loss to be insurable it must be
- due to chance
- be definite and measurable
- must be predictable
- the loss cannot be catastrophic
Uninsurable risk
Non-insurable risk are types of risks that the insurer is not ready to insure against simply beacuse the likely future losses cannot be estimated or calculated
These risks cannot be measured or forecasted
Consumer demand
Floods
Technological change
Contingency Planning
Contingency plans are an agreed course of action that a business and its employees will adopt should things go wrong.
The main aims are to
- contain and minimise the damage to persons or property
- to allow the main operational functions of the business to continue
Plans are constructed with the worst case scenarios in mind
Contingency Planning examples
Flood
Fire
Death of key employee
Cyber attack
Terror attack
Pressure group activty
Supplier failure
Analysis of contingency plans
Advantages
It reassures stakeholders that the firm is aware of risks and has a plan of action ready
Public relations are better managed in time of crisis - pre prepared press releases can buy a firm time to assess their full response
Managers have to spend less time “firefighting” should a crisis actually occur as they already have a planned out response.
Disadvantages
It takes up valuable management time that could be spend elsewhere
No guarantee that a plan will be effective in dealing with risk
Plans can encourage inflexibility in how a business handles a crisis
The plan needs constantly updating
Evaluation of risk management
It is impossible to identify all threats and estimates of probability are often guesswork
Effective risk management will help to increase stakeholder trust and confidence
It provides a reliable basis for effective decision making
Risk management should be built in to corporate strategy and objectives
Contingency planning is a key test of weather a business is looking to its long-term future. Spending 5m now may save 100m in the future.
