Introduction
Risk Management Process is a methodology by which risks are formally identified, measured and treated to ensure that risk is avoided, transferred or mitigated. As part of the process number of actions and mitigations are carried out to reduce the likelihood of occurrence and the impact severity of the risk.
The Risk Management Process includes the following steps:
- Create a policy
- Risk identification
- Risk assessment
- Risk Treatment
- Risk Recording & Reporting
- Risk monitoring and review
- Communication
Create a Policy
The starting point is the creation and setting up a well-documented policy for the risk management framework. The policy should clearly elaborate on the elements of the risk management framework and the process.
a. Risk Identification
After establishing the policy and setting the required environment, within which the firm operates, is the identification of individual risks. The comprehensive identification is crucial for the overall risk management process because a risk that is not identified at this stage will not be included in further analysis. Firms can use methods like PESTEL, IRM Wheel, Horizon scanning etc. to identify the risk.
b. Risk Assessment
Identified risks need to be put into perspective in terms of the potential severity of impact and likelihood of their occurrence. Assessing and categorizing risk, assists in prioritizing and filtering the risks. Risk analysis and evaluation are part of the risk assessment process.
c. Risk Treatment
After the risk has been identified and analysed, firm’s management evaluates to determine which risks are to be treated and the method and priority for treatment. Whether the risk has to be accepted, reduced, transferred or avoided is decided and requisite action is taken.
d. Risk Recording & Reporting
Once all the above steps are completed, comes the part of how the recording has to be carried out. Depending upon the scale and criticality of the business line, management can decide if they want to carry out the risk management process in word and excel files or do they have to implement risk management software. So that recording and reporting are automated. Obviously, an automated system helps in better analysis and improves the quality of risk management.
e. Risk Monitoring & Review
The primary purpose of monitoring and review of risk by a firm’s management determines whether risks still exist, whether new risks have arisen, whether the likelihood or impact of risks has changed, and to reassess the risk priorities within the internal and external context. It helps to get feedback with regard to assurance over the efficiency and effectiveness of controls implemented to treat risks. It enables the firm to analyse and learn lessons from event successes, failures and near misses.
Other elements which form an important part of developing a risk management framework and implementing an effective risk management process include:
- Internal factors – The Risk management process and framework needs to be customised considering the firm’s process, people, products etc.
- External factors- As part of risk identification, various outside factors like regulatory, political, economical etc. to be taken into consideration.
- Communication – The success of a risk management practice depends on how well the same is communicated across the firm and if the firm is able to build a culture of risk.
Risk management is an important process that senior management should pay attention to. It is inevitable to have sound risk management practice and firms should have better strategies to deal with risks. The intensifying competition in the global markets has forced firms to focus on setting up a strong risk management program.
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