Briefly explain the six risk management processes

The six risk management processes are:
1) Determination of objectives.
2) Identification of risks.
3) Evaluation of risk exposures.
4) Consideration and selection of risk management techniques.
5) Implementation of decisions.
6) Evaluation and review.
 

Determination of objectives
The prime objective is to ensure the effective continuous operation of an organisation. The efficiency of risk management is hindered if the objectives are not clearly specified. If the objectives are specified clearly then the risk management process can be a holistic one instead of having isolated problems. The goals and objectives of an organisation have to be linked with the risk management objectives. The various objectives of risk management can be classified broadly as: Post-loss Objectives
º Survival of the organisation.

º Perpetuity of the organisation’s operations. º Steady flow of income/earnings. º Social obligation. Pre-loss objectives º Economy.
º Fulfillment of external obligations. º Reduction in anxiety.
º Social obligations.
 

Identification of risks
Risk identification is a process of identifying property, liability and personnel exposures to loss on a systematic and continuous basis. There is no ideal method to identify risk, but a combination of methods is used. Some methods are appropriate for certain organisations and others for specific work environments. The general methods for risk identification are checklists, questionnaire, flowchart, financial statement analysis and close examination of the operations.
Risk analysis questionnaire - The questionnaire has to be a simple listing of points and phrases. It is helpful in identifying the possible risk of particular departments. The questionnaire is to be distributed among the employees. As it is more direct in approach, it directs the respondent. It covers both insurable and uninsurable risks. The only drawback of this method is that it is difficult to identify the industry specific risk as the questionnaire is general in nature.
Checklist of exposures - This is a list for checking factors which may be risky to the organisation. The list need not be exhaustive but it must cover the major potential risky operations that apply to all businesses in general. In such a case, certain exposures unique to a given firm may not be included. But the risk manager needs to make sure that the checklist reflects the potential losses the business is exposed to.
Flowcharts - They can describe any form of flow within the company but they are system specific concentrating on specific events which are potentially risky. The activities are represented in a structural manner. The most important type is the one used in production flow. The risk manager with the help of this becomes acquainted with the technicalities and hence can ask a number of ‘what if’ questions to suggest answers.
Analysis of financial statement - It is very vital for the risk manager to have a thorough knowledge of the source and utilisation of funds. This method involves studying each account in detail and determining the potential losses created. The financial statements of a company include balance sheet, profit & loss account, cash flow statement, auditors report and report of chairperson. 

Evaluation of risk exposure
After identifying all possible risks from all angles the next step is to evaluate and measure them. Before evaluating, the risk needs to be measured in two dimensions of loss frequency and loss severity. While evaluating risks, risk managers need to consider the following: The importance or the severity of a risk. All types of losses due to a given event and their financial losses. The specification of the exposure as to how many would be affected and the timing of the exposure. The importance or the severity of a risk is more important than the frequency of occurrence.
 

Consideration and selection of risk management techniques
This should be done by selecting the most appropriate technique or a combination of techniques for treating the loss exposures. These techniques are applied based on the following two broad methods: Controlling the risk - Here the frequency and severity of the loss is reduced hence the risk is controlled. This is done by avoiding the risk and through reduction of exposure. Financing the risk - This method provides the financing needed for the losses either by retaining the risk or transferring the risk. These two methods seem to be different but they are not mutually exclusive, rather they are complementary to each other. In most cases they are used in a combined manner.
 

Implementation of decisions
The firm after identifying the risks and choosing the correct technique needs to decide the financial and administrative resources required. The next step is to identify the insurance company and negotiate and start the policy statements. The statement must outline the risk management objectives and the company policy with regard to treatment of loss exposures. The development of a risk management manual is essential in order to train the employees.

Evaluation and review
Evaluation and review is to be done periodically to check if the set objectives are attained. This is done from the point of view of the loophole identified in the existing strategy adopted. The review process is a continuous and ongoing activity. New techniques are adopted to protect the firm from new risks and maximum care is taken to make sure that existing mistakes do not creep into future strategies. This step not only analyses the extent to which the objectives are achieved but lays foundation for future course of actions.