5 Steps in Risk Management Process

          Now that we have understood the meaning on risk and also different types of risk in the previous article today let us try to understand risk management process.

 Risk Management Process helps us to identify so that we can take required measures to manage the risk properly.

Risk Management Process

          Risk Management process consist of the following steps

§  Identifying the risk and loss exposure

§  Analyzing the causes of risk and loss exposure

§  Identification or selection of risk management technique or controls

§  Understanding the level of risk using risk matrix

§  Implementing and Monitoring the risk management program.

Now let us try to understand each step in detail about the risk management.

§  Identification of the risk and loss exposure:

The very first step in the risk management is to identify the risk associated and also the loss exposure arising due the risk associated with an investment. Risk identification is the process of systematically assessing the different types of risk associated with the investment or a deal. Then analyzing and interpreting the different types of risk so uncover the losses that can take place due to the risk. This will help us to give the brief risks and losses that can occur due to this investment. The risk and loss exposure can be identified by risk analysis questionnaire, physical inspection, flowcharts, financial statements and historical loss data

§  Analyzing the causes of risk and loss exposure:

This is the second step where an individual or firm analyzes the data collected in order to discover the reasons or causes of risk and loss exposure that is associated with investment or deal. In this step a detail analysis is done and all the reasons why risk and how much loss exposure is identified with a view to minimize the risk and loss exposure by selecting the appropriate risk management technique.

§  Identification or Select the Appropriate Risk Management Technique:

This is the third step where an individual or a firm selects or identifies the risk management technique. In risk management technique there are two types risk control technique and risk financing technique. Risk Control technique is an organized way to decrease the possibility of unseen upcoming losses and its impacts. Risk financing technique refers to raising or creating provision for fund which is specially used to cover the unexpected financial losses.

§  Understanding the Level of Risk using Risk Matrix

This is the fourth step where an individual or firm try to understand the level of risk - low, moderate and high so that he can check that the return or reward can be accepted or not with the level of the risk in the investment deal.

§  Implementing and Monitoring the Risk Management Program

This is the final step every a individual or firm after implementing the risk management techniques starts to monitor the investment so that any risk or event impact does not affect the investment or how assess the effectiveness of the technique used.