INTRODUCTION
TO RISK
MANAGEMENT
PREPARED BY: MS. IDA
RISK MANAGEMENT
● Focuses on the negative weaknesses and threats rather than the strengths and
opportunities of the organization
● Deals with the prevention and contingency plan of the organization when
dealing on events that may and can affect the organization
RISK
● It is the probability that some future event could adversely impact the
organization.
● Risk is measured in terms of probability (likelihood) and impact (magnitude)
● It is exposure of the organization and its particular assets to the possibility of
loss, injury, or other adverse (negative) event
● This is inherent in every business. Entrepreneurs need to be willing to take risks,
as without risk there can be no meaningful gain.
Process of Risk Management
1. Identify the Risk
2. Analyze the Risk
3. Evaluate or Rank the Risk
4. Treat the Risk
5. Monitor and Review the Risk
Risks can arise due to External or Internal
(factors) influences:
➔ External risks are exposures that result from environmental conditions that the
firm commonly cannot influence, such as the regulatory environment and
market conditions.
➔ Internal risks are exposures that derive from decision-making and the use of
internal and external resources, including the firm's operations and its
objectives.
Elements of Risk Management
● Process
● Integration
● Culture
● Infrastructure
Classification of RISK
● FINANCIAL RISK
The risk which has some direct financial impact on the entity is treated as
financial risk.
This risk may be : liquidity risk, market risk, credit risk, market liquidity risk,
hedged positions risk, portfolio exposure risk, derivative risk, accounting
information risk and financial reporting risk.
Classification of RISK
● NON-FINANCIAL RISK
This type of risk do not usually have direct and immediate financial impact on
the business, but the consequences are very serious and later do have
significant financial impact if these risk are not controlled at the initial stage.
This type of risk may include : operational risk, regulatory risk, environment
risk, integrity risk and leadership risk.
Risk Associated With Investments
Business Risk
refers to the uncertainty about the rate of return caused by the nature of the
business. The most frequently discussed causes of business risk are uncertainty
about the firm’s sales and operating expenses.
Liquidity Risk
is associated with the uncertainty created by the inability to sell the investment
quickly for cash.
Risk Associated With Investments
Business Risk
refers to the uncertainty about the rate of return caused by the nature of the
business. The most frequently discussed causes of business risk are uncertainty
about the firm’s sales and operating expenses.
Liquidity Risk
is associated with the uncertainty created by the inability to sell the investment
quickly for cash.
Risk Associated With Investments
Default Risk
related to the probability that some or all of the initial investment will not be
returned. The degree of default risk is closely related to the financial condition
of the company issuing the security and security’s rank in claims on assets in the
event of default or bankruptcy.
Interest Rate Risk
Because money has time value, fluctuation in interest rates will cause the value
of an investment to fluctuate also. Although interest rate risk is most commonly
associated with bond price movements, rising interest rates cause bond prices
to decline and declining interest rates cause bond prices to rise.
Risk Associated With Investments
Management Risk
Decisions made by a firm’s management and board of directors materially affect the
risk faced by investors. Areas affected by these decisions range from product
innovations and production methods (business risk) and financing (financial risk) to
acquisitions.
Purchasing Power Risk
Purchasing power risk is perhaps, more difficult to recognize than the other types of
risk. It is easy to observe the decline in the price of a stock or bond, but it is often more
difficult to recognize that the purchasing power of the return you have earned on an
investment has declined (risen) as a result of inflation (deflation).
Risk Associated With Manufacturing, Trading
and Service Concerns
A. Market Risk
B. Operation Risk
C. Financial Risk
D. Business Risk
Potential Risk Treatments
Potential Risk Treatments
RISK AVOIDANCE
This include performing an activity that could carry risk. An example would be not
buying a property or business in order not to take on the legal liability that comes
with it.
Potential Risk Treatments
RISK REDUCTION
Risk reduction or optimization involves reducing the severity of the loss or the
likelihood of the loss from occurring. Optimizing risk means finding a balance
between the negative risk and the benefit of the operation or activity; and between
risk reduction and effort applied.
Potential Risk Treatments
RISK SHARING
Risk sharing means sharing with another party the burden of loss or the benefit of
gain, from a risk, and the measures to reduce risk.
RISK RETENTION
Risk retention involves accepting the loss or benefit of gain from a risk when it
occurs.
Areas of Risk Management
The most commonly encountered areas of risk management include
1. Enterprise risk management
2. Risk Management activities as applied to project management
3. Risk management for megaprojects
4. Risk management of information technology
5. Risk management techniques in petroleum and natural gas
SEC Requirement Relative to Enterprise Risk
Management for Publicly-Listed Companies
2.11 BOD should ensure that Enterprise Risk Management (ERM) is in place to
effectively identify, monitor assess management key business risks.
2.12 which deals with the strengthening of the Internal Control System and
Enterprise Risk Management Framework states that:
“To ensure the integrity, transparency and proper governance in the conduct of its
affairs, the company should have a strong and effective internal control system and
enterprise risk management framework”
Steps in the Risk Management Process
1. Set up a separate risk management committee chaired by a board member.
2. Ensure that a formal comprehensive risk management systems in place.
3. Assess whether the formal system possesses the necessary elements.
4. Evaluate the effectiveness of the various steps in the assessment of the
comprehensive risk faced by the business firm.
5. Assess if management has develop and implemented the suitable risk
management strategies and evaluate their effectiveness.
6. Evaluate if management has designed and implemented risk management
capabilities.
7. Assess management’s efforts to monitor overall company risk management
performance and to improve continuously the firm’s capabilities.
Steps in the Risk Management Process
8. See to it that best practices as well as mistakes are shared by all. This involves
regular communication of results and feedbacks to all concerned.
9. Assess regularly the level of sophistication of the firm’s risk management
system
10. Hire expert when needed.
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