Principles and Steps of Risk Management
By Charles Hopkins
Published 09/20/2007 | Internet
The term risk management is not only applicable to economics. It is
also applied to diverse disciplines such as psychology, social
sciences, biology, systems analysis, operations research, decision
theory, toxicology, engineering, and statistics, among others.
Risk management is the process of gauging or assessing risk and
developing strategies to manage it. Risk management is the process of
prioritizing risk with the greatest loss and the greatest probability
of occurrence. Risk that would have lower loss is handled later. Risk
management identifies a new type of risk, the kind wherein it has a
100% probability of occurring but continues to be ignored by the
organization due to lack of identification ability.
Another problem encountered in risk management is difficulty in
allocating resources. Consequently, the ideal type of risk management
is one that reduces the negative effects of risks.
Risk management can cover almost anything, depending on the field
of discipline. For bankers and financial officers, risk management may
be the sophisticated use of techniques such as currency hedging and
interest rate swaps. Hospital administrators think about quality
assurance when they think about risk management. To safety
professionals, risk management involves the reduction of accidents and
Before anyone can start risk management, a statement of risk must
be made. Such statement must compose of a description of the loss and a
description of the current conditions that may lead to a possible loss.
A sensible risk management is all about ensuring that workers and
the public are properly protected. It enables innovation and learning.
It provides overall benefit to society by balancing benefits and risk.
A good risk management enables individuals within the organization to
understand that aside from the right of protection they too have to
Risk management is not about generating lots of paperwork. It is
not about reducing protection of people from risks that cause real harm
and suffering. It is also not about scaring people by exaggerating
trivial risks. It does not stop important recreational and learning
activities for individuals where the risks are managed. Lastly, risk
management does not aim to create a totally risk-free society.
Similar to all types of processes, risk management follows certain
steps. The first step is to establish the context. Identifying the
objectives or the basis upon which risks are being evaluated does this.
The framework for the process and agenda for identification must be
established. Lastly, analysis of the risk involved in the process must
be developed. After the context has been identified, the next step is
to identify potential risks. The chosen method of identifying risks
would depend largely on culture, industry practice and compliance.
The next step is to create the plan, proposing applicable and
effective controls for managing risks. The last two steps are
implementation of the plan and review and evaluation of the plan.
Chances are, the initial risk management plans would have
imperfections. Review and evaluation allows for improvement of the plan.