Whether you’re running a business, maintaining a public entity, or looking to safeguard your personal assets, the risk of loss is unavoidable and ever-present. Fortunately, there are some time-tested methods to help you manage those risks. A risk management plan involves implementing various techniques that can help mitigate or, in some cases, prevent loss.
There are multiple ways to organize a risk management plan, but steps commonly consist of identifying, assessing, and managing risks. Entities also need to continually monitor and review their policies and procedures to ensure their courses of action remain applicable and relevant.
Types of Risks
There are several types of risks an entity may encounter, including:
- Financial risk involves the possibility that an entity may lose money, fail to make gains on investments such as pension funds, or not maintain the cash flow necessary to remain solvent.
- Strategic risk refers to how an entity’s decision-making or overall plan may result in loss or a failure to meet objectives.
- Operational risk relates to anything that could impact an entity’s day-to-day functions, operations, or business activities.
- Reputational risk involves threats to an entity’s good name, reputation, or standing with the public or its constituents.
- Hazard risk refers to events that can harm individuals, property, or the environment.
- Cybersecurity and fraud risks relate to events that may occur through shortcomings in an entity’s IT or security systems.
- Compliance and legal risk refers to the losses that may arise from an entity’s failure to adhere to federal or state regulations.
Risk Management Process
While there are plenty of examples of risk, a comprehensive risk management plan is key to overcoming them. While effective risk management will be tailored to your specific circumstances, a common strategy follows these steps:
- Identify the risk. By carefully examining their operations, entities can discover several types of exposures that have the potential to create a loss.
- Assess the risk. After identifying threats, entities can analyze the probability of the risks occurring and their potential severity.
- Manage the risk. Following the risk assessment, an entity needs to determine how it will address the risks. Options include:
- Avoid: Elimination of the risk.
- Modify: Mitigating a risk’s impact or lessening the likelihood of it occurring.
- Transfer: Shifting the risk to a third party (e.g., an insurance company) through a contract, or a hold-harmless agreement with a vendor. This can include being added as an Additional Insured on their policy.
- Retain: Accepting the risk (or a portion of it) when the risk is deemed acceptable (e.g., it has a low likelihood of occurring or it would have a minimal impact).
- Monitor and review the plan. A crucial part of the risk management process involves continued monitoring and reviewing of strategies to help prepare for evolving or new hazards.
Risk Management Benefits
There are several benefits associated with implementing effective risk management protocols. Not only do these protocols mitigate or eliminate potential risks, but they may also lower insurance premiums, as insurers may note how they reduce the likelihood of filing an insurance claim. Insurers may also offer resources to help a business strengthen its risk management practices.
