Understanding Risk Management Concepts

• Risk is the possibility of loss, injury, or unwelcome circumstances.
• Investopedia defines risk as the chance an investment's return will differ from expectations, potentially losing some or all of the original investment.
• Wikipedia defines risk as potentially gaining or losing value.
• Risk is the potential for damage, injury, liability, or loss due to internal or external vulnerabilities, according to the Business Dictionary.
• NEDA defines risk as the possibility of deviation from the expected project outcome.
• IIA defines risk as the possibility of an event impacting an organization's objectives.
• Changes can be certain or unavoidable.
• Risk refers to changes in personal life/health, management, financial situations, and the overall economy.

Risk Elements

• Risk is an effect, a result, and an outcome of actions taken or not taken despite uncertainty.
• Exposure is the possibility of gain or loss.
• Uncertainty involves two or more potential outcomes for an event or situation.
• Risk is characterized by uncertainty and the potential for gain or loss.
• Objective risk is the relative variation of actual loss from expected loss.
• Subjective risk is the personal perception or feeling of risk.

Business Risks

• Business risk is the possibility that a company may experience a loss in profit.
• Increased competition can reduce market share and profits when new or existing businesses offer similar products or services.
• Economic circumstances like downturns, inflation, recessions, or global financial crises can impact consumer spending and business profitability.
• Poor financial management, excessive debt, lack of funding, or cash flow issues can lead to business failure.
• Changing consumer tastes, trends, or demands can make a product or service less desirable.
• Changes in government policy, such as new laws, taxes, and trade regulations, can impact business operations and profitability.
• If a business fails to innovate and adapt to new technology or industry trends, its product or services may suffer.
• Natural disasters, legal issues, supplier disruptions, or cyberattacks are inherent factors that can threaten business.

Types of Risks

• Political risk may include a change in government policy.
• Inflation risk, also known as purchasing power risk.
• Exchange rate risk is indirect and is involved in foreign exchange fluctuations.
• Currency risk arises due to uncertainty in exchange rates.
• Interest rate risk involves the relative value of a security that will worsen due to an interest rate increase.
• Liquidity risk The possibility of operational difficulties including a short-term inability to convert assets to cash.
• Credit risk is the possibility of loss attributed to a debtor’s non-payment on a loan or noncompliance of contractual obligations.

Sub-Categories of Business Risks

• Market risk, also known as systematic risk.
• Strategic risk involves identifying, assessing, and managing risks.
• Sales risk is the potential for sales failures.
• Management risk is the possibility of losing management support.
• Budget risk is the likelihood for approximations or estimations to be incorrect.

Classifications of Risk

• Pure risk, also known as absolute risk.
• Speculative risk involves the chance of loss, no loss, or gain.

Main Sources of Loss

• Personal loss exposures
• Property loss exposures
• Liability loss exposures
• Catastrophic loss exposure
• Accidental loss exposures

Risk Types

• Hazard risk Arises from property, liability, or personnel loss exposures.
• Operational risk arises from people, processes, systems, or controls.
• Financial risk arises from the effect of market forces on financial assets or liabilities.
• Strategic risk arises from trends in the economy and society.
• Diversifiable risk, also called non-systematic or particular risk.
• Non-diversifiable risk, also called systematic risk or fundamental risk.
• Frequency is the number of times losses have happened in a given time period.
• Severity denotes how significant the loss has been in both human and monetary terms.
• Peril is the direct or immediate cause of loss.
• Hazard is a condition that increases the possible frequency or severity of a loss, or both.

Test your knowledge of risk management principles. This quiz covers topics such as defining risk, subjective vs. objective perspectives, strategic risks, and different risk types. It also explores the relationship between uncertainty and risk assessment.