Risk management involves identifying, evaluating, preventing and reducing the negative impact of certain contingencies.
Risk management is planning that is carried out for the identification, evaluation, prevention and reduction of the impact of certain contingencies or threats . These procedures involve the development of a series of actions that aim to control uncertainty .
It should be noted that risk is associated with the possibility or proximity of damage . The idea of damage , meanwhile, refers to harm or detriment . Risk management, in this way, consists of carrying out various tasks and tasks to manage or administer situations that may be problematic or harmful.
Development of risk management
The development of risk management involves the implementation of a series of stages. Although risks can have very varied characteristics depending on the scope and situation, at a general level it can be indicated that management requires a series of steps:
- Risk identification : It is essential to recognize possible events capable of causing damage to start working with them.
- Risk analysis : Once identification is achieved, risks must be examined to understand their features and potential impact .
- Risk assessment : Based on the analysis of scenarios and the properties detected, the risks are evaluated to determine which interventions are priorities.
- Risk monitoring : Each risk identified, analyzed and evaluated must be monitored to see if the possibilities of harm occurring increase. This observation is also linked to risk control .
- Risk mitigation : In line with monitoring and control, actions must be carried out that allow risk reduction . The ideal is to take its probability to 0.
It is important to mention that risk management is usually associated with crisis management . Just as various processes are developed in order to avoid damage, it is important to have a plan to contain and resolve problems and thus promote disaster recovery .
Various types
Risks are part of everyday life. It could even be said that they are inherent to existence since absolute security is almost impossible in all areas, just as certainties are rare.
Enterprise risk management ( ERM , according to the acronym corresponding to the English expression enterprise risk management ) is the notion that refers to the set of processes and methodologies that companies develop to prevent, control and reduce damage. ERM is a strategy that seeks to provide a certain level of security related to the fulfillment of corporate objectives.
Financial risk is one of the main concerns of organizations. It is associated with the possibility of events occurring that cause a negative effect on the entity's finances .
Environmental risk management is a concern at a social level.
Financial risk management
As can be seen, the concept of financial risk is very broad because it covers possible contingencies of diverse origin. That is why different types of financial risks can be recognized.
Operational risk is one of them, being related to the losses that may occur at the operational level due to deficiencies or failures of people, processes or systems or the emergence of an external event that was not contemplated.
Market risk , in turn, is linked to fluctuations in the price of financial instruments such as bonds or stocks. In this context , interest rate risk and exchange rate risk can also be recognized, both related to the volatility of these variables.
It is interesting to note that in the finance sector the importance of risk diversification is often mentioned. The practice is based on investing in a wide range of assets to minimize the aforementioned volatility and reduce the total risk.
Liquidity risk , on the other hand, is a financial risk that originates from the possibility of not having the liquid money essential to fulfill an obligation. We also talk about credit risk when considering that some party to a financial contract may not assume its commitment.
In the insurance industry, risk management is very important.
Environmental catastrophes
Beyond the business or corporate field, there are other risks. The idea of environmental risk refers to the probability that a catastrophe will occur in the environment, either due to human actions or due to a natural phenomenon.
It is possible to differentiate, therefore, between anthropic risks (generated by people through their activities) and natural risks (linked to climate and geology). Sometimes, both types of risks are combined or even enhanced: an earthquake can destroy an industrial plant that, in this context, releases polluting substances.
The risk of natural disasters generates great concern among the population because they tend to think that nature is unpredictable . However, today science is in a position to forecast, with more or less precision and anticipation depending on the case, a multiplicity of natural phenomena. This allows meteorology , for example, to anticipate the possible development of strong storms or the arrival of a hurricane.
Currently, there is international concern about climate risk , which is linked to how global warming can affect ecosystems and humans in general. The United Nations ( UN ), through different organizations, is working to manage climate-related risks and alerting country governments about this issue.
Risk management in the insurance industry
Risk management is key in the insurance industry. A policy is a contract through which an insurer, through the collection of a premium, covers a risk and assumes the commitment to compensate the insured in the event of the event whose risk is the object of the coverage.
Suppose a person buys a car . The assets represented by the vehicle in question can be affected by a crash, hail , a fire or theft , among other variables. To protect themselves from these risks, the individual takes out insurance, paying the corresponding premium. Thus, the insurance company will pay a certain amount to the beneficiary if the damages detailed in the contract are realized.
Due to the characteristics of their operation, insurers have to respect specific regulations and comply with different guidelines, so that they always have the necessary capital to assume coverage and at the same time be profitable. The evaluation of the risks they cover, in short, is essential.