Today
risk has become the part of our lives. When it comes to financial risk we often
fall to assess the risk properly and take the required steps to minimize the
risk so that even if loss take place that doesn’t affect your financial
condition much. Today in this article we will discuss how to assess the risk
and which are the appropriate strategies for the different types of risk.
Risk Identification
Risk
Identification is a process of identifying and measuring different types of
risk and classifying them so that it can be treated with the appropriate risk
management strategy.
Now
that you have understood what does risk identification means let us discuss
about how to assess and identify the risk and classify them
Before we start the process of risk identification
and classification there are few points to remember
§ Each and every investment whether it is 1 dollar or 10000 dollars
each investment has its own risk associated
§ No investment is risk free
Now let us discuss the steps in risk
identification
§ Identification of the Loss Exposure:
First and foremost thing is to see in an investment deal is what is
the expected loss that if loss takes place. Then once you have identified the
loss exposure now you need to analyze the loss exposure in detail
§ Analyzing of Loss Exposure
In order to assess the loss exposure and the reasons for the loss
exposure now you need to study the deal in detail. At this point study the loss
exposure in detail and try to discover the reason for the loss in order to
assess the loss exposure refers all the related material. While assess the risk
go through different types of risk. Now analyzing the risk classify them in to
its types it will help to treat the risk with the appropriate strategies.
§ Classification of Risk
Generally we classify the risk into Low risk, Moderate Risk, High
Risk and very High Risk while assessing and treating the risk. To classify
different types of risk go through the following Risk Assessment chart and
classify them.
 |
| RISK ASSESSMENT CHART |
·
Low
Risk:
Low Risk comes to picture when the frequency and the severity of
the risk are low i.e. there are very less chances of occurrence of the loss and
even if the loss takes place it is very less and can be absorbed by an
individual and doesn’t affect the portfolio much. The low risk usually doesn’t
cause any serious damage or harm.
·
Moderate
Risk:
Moderate Risk comes into picture when there is low severity and
high frequency of the occurrence of the loss i.e. when there are many chances
and it takes place repetitively but the amount of loss is less. Some of the characteristics
of risk are
·
High
Risk:
High Risk is referred to the risk where there is high severity and
low frequency i.e. is the occurrence of loss is rare but when occurs causes a
huge damage or harm to an individual or portfolio. This type of risk results in
catastrophic types of risk. If this type of risk is not properly identified and
treated then it will put you in deep trouble and if it is any organization then
it may affect its operations.
·
Very
High Risk:
Very high risk refers to the risk where in there is high frequency
and high severity of loss i.e. is there are all possibilities as well as it is
take place very repetitively which will bring a disaster to the portfolio and
an individual or organization cannot bear the losses when it take place.
Now
that we have understood the risk identification and classification let us
discuss about the selection of appropriate risk mitigation strategies
Selection of Appropriate Risk Strategies
The
different risk mitigation strategies are
§ Risk Avoidance
§ Risk Control
§ Risk Transfer
§ Loss Reduction
§ Diversification of Risk
§ Duplication of Resources
§ Self Retention
Now that we know the risk mitigation
strategies let us discuss when and where to use which risk mitigation strategy
§ Very High Risk:
When there is very high risk
the best advice and the best strategy to adopt is risk avoidance. But if you
are still interested and want to take the risk then adopt risk transfer or self
retention risk mitigation strategy. And when you are adopting self retention
strategy make proper provision and management system to handle the losses.
§ High Risk:
High risk is similar to
Moderate risk and also known as High-Moderate Risk. High risk if identified
properly can be treated using following risk mitigation strategies. They are
risk avoidance, risk control, loss reduction, risk transfer, duplication of
resources, and segregation of exposures.
§ Moderate risk:
Moderate risk is neither to
high nor too low it is in between the high and low risk and it can be easily
treated if identified properly with the following risk mitigation strategies. They
are risk avoidance, risk control, loss reduction, risk transfer, duplication of
resources, and segregation of exposures.
§ Low Risk:
When it comes to low risk usually it is advised to adopt either
self retention strategy or loss reduction strategy as even if the loss takes
place then the amount of loss will not affect or cause much harm. Low risk is
like you have one lakh amount and you lost 100 rupees which will not cause you
much difference. So usually the best strategy to adopt is to self retention but
if you want to reduce even the mirror loss then adopt loss reduction strategy.
I hope now you have understood how
to identify and treat different types of risk in order to minimize the losses.
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