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What is Risk Management?

Risk is a part of our life, at every step we are overshadowed by various risks as each activity we do during the day involves some level of risk. It is a condition where there is a possibility of hazard from the desired outcome that is expected. For those who define risk as uncertainty, the greater the uncertainty, the greater is the risk. In other words, higher the probability of loss, greater is the probability of an adverse deviation from what is hoped for and therefore, greater is the risk.

However, these adverse effects or risks can be controlled and avoided through proper risk management. In other words, risk management involves identification, analysis and controlling risks which can threaten our life and assets.

Steps in Risk Management

Risk management involves various steps, which have to be taken into consideration in order to eradicate risk.

  • Identification of Risk

The first step in risk management is the identification of risk. Risk are events that causes problems, therefore it is essential to get to the root of risk. Risk identification must be recognized as the most important step as it involves digging into the source of risk which may be internal or external.

  • Risk Analysis

Once the risks have been identified, the next step is to analyse and measure that risks. Further, it is essential to study the risk and the hazard that an individual is exposed to.

  • Risk Assessment

Risks can be assessed depending upon the following factors:

a) Frequency of risk
b) Financial severity
c) Impact of the risk

Risk assessment involves measuring the frequency of occurrence of risk and the loss that it would result in. Some risks require prior attention to others depending upon the severity they would cause.

Dealing with Risks

We all are exposed to risks at all times, while travelling, while working, while driving, etc. Its just that some risks are more severe than others. Financial risks can be treated by the following four methods:

  • Avoiding Risk

The first step in risk management is to avoid the risk. This can be done by not undertaking activities that might cause risk. Like avoiding the risk of financial loss by not investing in the stock market. Despite being beneficial to manage risks, avoiding them would also mean avoiding the opportunities accompanied by a task.

  • Controlling Risk

Once the risk has conquered, the best method is to control the risk in order to avoid excessive loss that might be caused. For example, installing sprinklers and fire extinguishers in a petrol station, to control the loss that fire can cause.

  • Retaining Risk

The third step in risk management is retaining or accepting the risk. Risks that cannot be avoided are usually accepted. Self insurance is a method of accepting risks. A perfect example of this is life insurance. We cannot avoid risk to our life but accept the risks that we are exposed to. We cover ourselves in order to reduce these risks.

  • Transferring Risk

The fourth and the most commonly practiced method of dealing with risk is to transfer it. This refers to shifting the responsibility of the loss to another party. It is usually done by purchasing an insurance policy. It is a contract where the insurance company does not take over the risk but compensates certain percentage of the loss incurred by the risk. Thus, risk management involves identifying the risk and taking effective measures in order to control or reduce it.

 

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