Businesses generally face myriad threats stemming from technology issues, lawsuits, accidents, economic upheaval, natural disasters, and management errors. For a business to achieve its objectives, it has to assess and control risks to its capital and earnings. In other words, it has to have an effective risk management plan.
Importance of Risk Management
Risk management refers to the process of identification, evaluation, and elimination or minimization of potential threats. It enables a company to be aware of the risks at hand and guides them in proper decision-making. Additionally, a business can prevent potential risks or reduce their severity through effective risk management. In turn, this can help save business finances and ensure business continuity.
Traditional Risk Management Vs. Enterprise Risk Management
Traditional and enterprise risk management strategies have the following similarities:
- They both aim at mitigating risks in a business
- They both involve the purchase of insurance policies for protection against eventualities
- They both comply with regulatory bodies
Differences include: –
- Enterprise risk management involves a collaborative effort among different members of the risk management team. However, in the traditional approach, risk management is an individual responsibility of those in charge of the departments facing the risk.
- According to experts, organizations that employ the traditional risk management approach are typically more afraid to take risks than those using the enterprise risk management strategy.
What is the Process of Risk Management?
The process of risk management comprises these five chronological steps:
- Identification of risks
- Analysis of the risks with emphasis on their potential impacts
- Categorizing risks and prioritizing them depending on business goals
- Mitigating risks using the right strategies
- Evaluating the results of risk mitigation and adjusting where need be
Standards of Risk Management
- ISO 31000 – It outlines the principles of Enterprise Risk Management that guide organizations through the application of risk management strategies. It also stresses the importance of involving executive management in risk management.
- COSO ERM Framework – It highlights the key principles of ERM concerning performance, governance and culture, review and revision, strategy and objective-setting, and information, communication, and reporting.
- British Standard (BS) 31100 – This code outlines the steps of applying the risk management strategies stipulated in ISO 31000.
- RMM Framework – It outlines the basic attributes of a risk management strategy, enabling businesses to evaluate them at different levels.
Benefits and Challenges of Risk Management
Some of the key benefits of risk management include:
- It improves operations through constant elimination of risks
- It enhances safety at the workplace
- It promotes risk awareness in a business
- It enables employees and the management to have more faith in the business goals and strategies
- It ensures regulatory compliance
Risk management also presents challenges such as:
- Difficulty in reaching a consensus during risk analysis
- Tools required for risk management can be costly
- Risk management takes time, money, and effort to bear results
- It’s difficult to quantify the size of risks
- It may not be effective if it does not tally with the organizational culture
For extra protection and peace of mind, carry the right commercial insurance policies. For professional advice on the best risk management services, contact the experts at Knight Insurance Services. Our dedicated team is eager to assist you with all your coverage needs today.