outcomes based on probabilities. It can create both problems and opportunities for businesses and individuals. Risk regarding the possibility of loss can be especially problematic. When there is uncertainty about the occurrence of a loss, then risk becomes an important problem. THE BURDEN OF RISK The risk surrounding potential losses creates significant economic burdens for businesses, government and individuals. Millions of shillings are spent each year on strategies for financing potential losses. But when losses are not planned for in advance, they may cost even more. Therefore the cost of risk is the sum of:- Cont.….. 1) Expenses of strategies to finance potential losses 2) The cost of unreimbursed losses 3) Outlays to reduce risks 4) The opportunity cost of activities forgone due to risk considerations. SOURCES OF RISKS Property Risks. All organizations and individuals are exposed to risks that the property may be damaged, destroyed or stolen. Liability Risks. Liability judgment may result in payments made to compensate injured parties as well as punish those responsible for the injuries. Cont.…... Even in situations when an individual is absolved of liability, there are expenses involved in defending a case which could be substantial. Consequently, both individuals and businesses must be careful to identify all sources of liability risk that may affect them and then make suitable arrangements for dealing with such exposures to loss. Cont.…… Life Risks. Potential losses associated with the life of an employee. The immediate impact to loss of life is the pre mature death of the employee. The possibility of an untimely death of an employee exposes the employer to potential loss if the replacement of the skills and experience is not readily available. Cont.…… The death of an employee can be disruptive for other workers and may result to temporary reduced productivity. This is especially true if the death is due to job related conditions. Compensation due to death may involve payments of substantial lump sum to the next of kin. Cont.…… Health Risks. These are risks that affect employees due to unfavourable working conditions. This affect the workers and the employers in the sense that, the workers will be weak and therefore affect their productivity. On the other hand it may be the responsibility of the employer to cater for their medical expenses. This will make the organization incur losses associated to health care. Cont.…. Financial Risks. These include credit risks and interest rates. Technical Risks. These are risks to do with the introduction of new technologies at work place. This occurs when new equipment are procured and the staff may be lacking skills to operate them. Cont.….. Execution Risks. These are risks that may occur in the implementation of decisions. For example poor project management skills, diversion of initial projections etc. Commercial Risks. These are risks that are incurred in trade and other commercial activities. For example in procurement, sale of treasury bills and treasury bonds etc. What is risk management? Risk management is the systematic ongoing process by which an organization identifies, prioritizes and implements programs to reduce risk exposure in an organization. The process therefore focuses on management of potential adverse outcomes. Cont.…. Many businesses have a special department for instance Risk or Disaster Management Department that are charged with overseeing the firm’s Risk Management activities. The head of such a department often has the title of Risk Manager Some other firms have formed Risk Management Committees or have positions for Chief Risk Officer(CRO) who coordinates the firms risk management activities. Cont.…. The Risk Manager or the CRO are involved in many aspects of a firm’s activities e.g. Developing employee safety programs Examining planned mergers and acquisitions Analyzing investment opportunities Purchasing insurance to protect against some types of risk Setting up pensions and health plans for employees. The above are coordinated in a firm in order to meet strategic goals. This is so because risk management is an integral part of business planning. RISK MANAGEMENT PROCESS Whether the concern is with the government, an individual or a business situation, the same general steps can be used to systematically analyze and deal with risk. Risk Management Process encompasses;- 1. Establish the context 2. Identify the risk 3. Analyze the risk 4. Evaluate the risk 5. Treat the risk 6. Monitoring and review 7. Communication and consultation Establish the context
The strategic and organizational context in which
risk management will take place. For example, the nature of your business, the risks inherent in your business and your priorities. Identify the risks
There are many potential risks and its important
to identify relevant exposures to risks Firms exposure can be from a variety of sources including operational, financial and strategic activities. Thus define types of risk, for instance, ‘Strategic’ risks to the goals and objectives of the organization. Past events, future developments. Analyze the risks How likely is the risk event to happen? (Probability and frequency?) What would be the impact, cost or consequences of that event occurring? (Economic, political, social?) Evaluate the risks
Rank the risks according to management
priorities, by risk category and rated by likelihood and possible cost or consequence. Determine inherent levels of risk. Considerations should be given to the most probable size of any losses that may occur and to the maximum possible losses that might happen. Treat the risks
Develop and implement a plan with specific
counter-measures to address the identified risks. Consider: Priorities (Strategic and operational) Resources (human, financial and technical) Risk acceptance, (i.e., low risks) Treat the risks
Document your risk management plan and
describe the reasons behind selecting the risk and for the treatment chosen. Record allocated responsibilities, monitoring or evaluation processes, and assumptions on residual risk. A best way of treating risks is by way of mitigation Cont.…. Risk Mitigation. These are measures that are put in place in order to reduce the impact of risks in the event of occurrence. Risk Mitigation Techniques Accepting Risks. If the probability of occurring is low and the likely consequences minimal then, the organization can ignore the risk. Minimize Risk. Risk minimization can be realized by taking precautionary measures that would reduce potential risks e.g auditing, meeting standards, following procedures, respect of law etc. Cont.….. Share Risks. Risks may be proportionately be shared among the workers or organisations. For example the medical insurance for the civil servants. The medical expenses for civil servants are catered by the individual, government and the National Hospital Insurance Fund. Cont.….. Transfer risk. In some circumstances when it is not possible to change the nature of risk either through elimination or minimization, it may be possible to shift the risk to another party. Insurance premiums. Cont Use of contingency reserve. These are specific provisions for unforeseen elements of costs in any activity. While planning for activities it is necessary to set aside a certain percentage of the total cost to cater for uncertainties. This is derived from documentations of the past risk events which would have required the need for such contingencies. Cont.…… Mentoring. In mentoring programme junior or inexperienced officers are paired with senior officers in order to help them to learn the best practices. The experienced officers help the inexperienced personnel clarify problems, suggest solutions and monitor them as they develop skills. Monitor and review In identifying, prioritising and treating risks, organisations make assumptions and decisions based on situations that are subject to change, (e.g., the business environment, trading patterns, or government policies). Risk Managers must monitor activities and processes to determine the accuracy of planning assumptions and the effectiveness of the measures taken to treat the risk. Cont.….. Risk management therefore should be an ongoing process in which prior decisions are reviewed regularly. Sometimes new risk exposures arise or significant changes in expected loss/frequency occur. The dynamic nature of many risks requires a continual scrutiny of past analysis and decisions. How to Identify risks at Work Place Brainstorming. This is done by bringing all members of staff together for a meeting in order to generate good list of potential risk factors. Expert opinion. The organization can consult experts either within the organization or seek for consultancy services from other professionals. Cont.……. Alternatively the organization may consult form other organizations which have had similar experiences. History. In most cases the best source of information on future risks is history. The management should be able to know the risks that have been frequently occurring over a period of time. Cont.….. Team based assessment. Using single – case sources to identify risks in an organization is itself a risky proposition. This due to the potential bias in any one person’s viewpoint. Risk management process can only be achieved if the organization involves people with different capacities in handling risk situations. Questions. 1. Identify risk prone areas in your organization and ways in which an organization can mitigate against such risks. 2. What challenges do organizations face in managing risks? THE END