Risk Management Introduction

Risk Management Introduction

• Risk can lead to losses, but also to gains.
• Two main elements: probability/uncertainty and consequences.
• International Organization for Standardization (ISO) defines risk as "Effect of uncertainty on objectives."
• Oxford English Dictionary (OED) defines risk as "Exposure to the possibility of loss, injury, or other adverse circumstances."
• Cambridge Advanced Learner's Dictionary defines risk as "The possibility of something bad happening."
• Uncertainty is a future event that may or may not happen and its probability can only be estimated.
• Uncertainty can prevent or delay the achievement of organizational objectives.
• Hazard/threat is an uncertain event with a negative outcome.
• Managing risk involves using strategies to reduce the probability or impact of negative events.
• "Downside risk" in investments is the negative outcome.
• "Upside risk" is the opportunity for positive outcome beyond expectations.
• Key components of risk include probability/likelihood of uncertainty, uncertain future events, and impact/consequences.

Types of Risks

• Dynamic/speculative risks are caused by economic changes and can lead to gains or losses. These risks are not insurable.
• Static/pure risks are limited to the chance of a loss or maintaining the status quo. These risks are insurable.

Risk Categories/Universe

• Financial risk, ICT/Cyber risk, Operational risk, Strategic risk, Reputation risk, and Compliance risk.
• External risk is outside the organization's control; includes disasters (earthquakes, wildfires, floods, pandemics), trends, and economy.
• Managing external risks involves timely monitoring and contingency planning (BCP, DRP) and increasing risk awareness.
• Strategic risk is where strategy becomes less effective.

Operational Risk

• Operational risk results from failed or inappropriate policies, systems, or procedures, both technical and human factors.
• Areas of concern include system failures, poor service delivery, inadequate planning, health & safety issues, and staff skill limitations.
• Management involves understanding business processes and seeking expert advice.

Compliance and Legal Risk

• Important laws, regulations, contracts, and agreements apply to all organizations (Environment, Safety and health at work, Food safety, licenses and permits, GDPR).
• Managing involves understanding business practices and consulting experts.

Reputation Risk

• Risk that organizational actions threaten its image and reputation.
• Management entails responding to negative events or publicity.

ICT and Cybercrime Risk

• Risk associated with the use of information and communication technology (ICT), data security and network security.
• Data protection, privacy, IT fraud, phishing, industrial espionage, and hacking are serious threats.

Financial Risk

• Risks related to financial operations including: Credit risk (party failure), Currency risk (exchange rate fluctuations), Interest rate risk, and Liquidity risk (funding trouble).

Risk Appetite

• The amount or level of risk an organization is willing to accept, tolerate, or expose itself to in business activities.
• Risk appetite guides risk measures and controls.
• Understanding risk appetite involves considering acceptable growth, return, and risk trade-off levels.

Risk Measurement

• Risk measurement quantifies risks to an organization.
• Risks are identified, described, and mapped, and are determined using probability and impact factors.

Risk Analysis

• A method for quantifying specified risks (risk = probability x consequence).
• Steps include identifying, describing, and mapping risks and determining their probability and impact.

Risk Management Approach

• Four Critical Steps: Identification, Assessment, Mitigation, and Review/Control. This process focuses on identifying risks, assessing their impact and likelihood, determining appropriate mitigation strategies, and monitoring implemented controls over time.

Stakeholder Risk Analysis

• Involves different stakeholders (internal/external) during risk analysis.
• Useful for a thorough risk analysis.
• Steps include: preparation, risk policy review, risk identification, risk analysis, articulating mitigation efforts, and reporting conclusions and recommendations.

Risk Identification Methodologies

• Tools include Checklist, Brainstorming, Interviews, etc.
• Risk Register is a tool that facilitates the recording of risks.

Risk Analysis Tools

• Including Fishbone diagram (cause and effect), Error Tree analysis (root cause), Quantitative analysis, and Qualitative analysis.

Risk Scoring

• Probability of risk occurrence and impact of event occurrence are utilized in determining the overall risk score.
• Probability and impact scores are used in risk matrices to prioritize risks and risk measures.

Risk Response: How to Deal With Risks

• Choosing appropriate responses based on the risk analysis's findings.
• Methods such as avoidance, reduction (or mitigation), transfer or acceptance.

Articulating Measures

• Determining appropriate measures and articulating them within a risk register.
• Includes description of measures, causes, owner, probability, impact, risk measure, cost, deadline, and accountability.

Insurance

• Contract that indemnifies(protects) one party against specified loss/contingency.
• Insurance coverage protects against risks (e.g., fire, theft), based on contracts with insurance providers.

Transfer of Risks

• Transferring risk with agreements/contracts and insurable risks.
• Not all risks are insurable (dynamic/speculative risks).