Risk Management and Different Types of Risk Management

The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.
The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.

What is Risk Management

Risk management is an important concept that mainly aims at identification, assessment, and prioritization of events that may have an adverse impact on the organization. Risk management can be considered as a very powerful strategic tool and has become more prevalent in recent decades due to rapid growth in industrial sector. Risks can be uncertainty in financial markets, failure of projects, legal liabilities, credit risk, accidents of natural causes and disasters, etc. Avoiding the risk, transferring the risk to another party, reducing the impact of the risk are some strategies to manage risk.

Risk Management Definition

"Risk management is defined as the logical development and carrying out of a plan to deal with potential losses. The purpose of the risk management programme is to manage an organisation exposure to loss and to protect its assets."

- Mark S. Dorsman

Types of Risk Management

Assessment of the risk, obtaining options for handling the risk, and analyzing the risks in order to determine the ways in which the same may change are some ways to deal with risk. There are different types of risks and management must be aware of all the kinds. The risks can be financial risks, process risks, intangible risks, time risks, human risks, legal risks, and physical risks. Brief notes on various types of risks;

Financial Risk: Financial risk is the loss of key resources like funding, etc. In this case the company will not have adequate cash flow to meet financial obligations. Credit risk, liquidity risk, market risk, operational risk are different types of financial risks.

Credit Risk and Investment Risk: When the borrower becomes default and was unable to make payments as promised it is said to be Credit risk, also called default risk. Investment risk was associated with this where the investor losses his principal and interest too.

Liquidity Risk: Sometimes due to lack of liquidity in the market an asset cannot be sold to make the profit or to prevent a loss this is what called as Liquidity risk.

Market Risk: Due to the change in value of the market risk factors value of investment portfolio or the value of a trading portfolio will decrease. Foreign exchange rates, stock prices, interest rates, and commodity prices are the standard Market risk factors.

Operational Risk: A risk arising from execution of an organisation's business functions is Operational risk. Risks arising from the people, systems and processes through which an organisation operates. Fraud risks, legal risks, physical or environmental risks are other categories included under this.

Process Risk: Risky business processes that could lead to project failure are Process risks.

Intangible Risk: Those risks that are often associated with damage to the reputation of an organisation or its brand are Intangible risks.

Time Risk: Risks which often involve things connected to time are Time risks.

Human Risk: Loss of critical employees or knowledge which are connected to manpower are Human risks.

Legal Risk: Losses include government regulations and the same having an impact on the operations of the company are Legal Risks.

Physical Risk: Physical risks are those loses of physical resources such as equipment, buildings, land, etc due to natural disasters or man made.

Risk management process begins when somebody asks what kind of events can damage the business and how much damage can be done. Identifying and measuring the potential loss exposures, choosing the most efficient methods of controlling and financing loss exposure and implementing them and finally Monitoring all the out comes are the main steps involved in Risk Management.

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Comments 8 comments

Sithuwam 5 years ago from Melbourne

good article dilipchanra. Technical risks is also another area to consider.

issa 4 years ago

i want get infromation that how is risk management used and who used risk management and also risk management in custome

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diamond1mo 4 years ago from Arizona

Good article. I will linke to it. Thanks.

KE Morgan

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mothercristina 4 years ago

Thanks for this info. Very helpful

HELEN 2 years ago


Gustaff Chikasema 2 years ago

Good article I will employ it in my day to day job

amanda cele 2 years ago

very interesting article to read rlly tot me alt about risk management

NYEBAZA NAUME. 14 months ago

It was good.

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