Risk Management: Objectives, Advantages And Disadvantages
Risk Management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risks, accidents, natural causes and disasters as well as deliberate attacks from an adversary.
Risk management is the acceptance of responsibility for recognizing, identifying, and controlling the exposures to loss or injury which are created by the activities of the University. By contrast, insurance management involves responsibility for only those risks which are actually insured against.
Meaning and Definition of Risk Management
According to Jorion___” Risk management is the process by which various risk exposures are identified, measured and controlled. Our understanding of risk has been much improved by the development of derivatives markets”.
Accordingly, the term ‘risk management’ refers to the systematic application of principles, approach, and processes to the tasks of identifying and assessing risks, and then planning and implementing risk responses. This provides a disciplined environment for proactive decision-making.
Objectives of Risk Management
- Ensure the management of risk is consistent with and supports the achievement of the strategic and corporate objectives.
- Provide a high-quality service to customers.
- Initiate action to prevent or reduce the adverse effects of risk.
- Minimize the human costs of risks, Where reasonably practicable.
- Meet statutory and legal obligations.
- Minimize the financial and other negative consequences of losses and claims.
- Minimize the risks associated with new developments and activities.
- Be able to inform decisions and make choices on possible outcomes.
Advantages of Risk Management
- It encourages the firm to think about its threats. In particular, risk management encourages it to analyze risks that might otherwise be overlooked.
- In clarifying the risks, it encourages the firm to be better prepared. In other words, it helps the firm to manage itself better.
- It lets the organization prioritize its investment and reduces internal disputes about how money should be spent.
- It reduces duplication of systems. Integration of environmental and health and safety systems are one instance.
Disadvantages of Risk Management
- Qualitative risk assessment is subjective and lacks consistency.
- Unlikely events do occur but if the risk is unlikely enough to occur is maybe better to simply retain the risk and deal with the result if the loss does in fact occur.
- Spending too much time assessing and managing unlikely risks can divert resources that could be used more profitably.