HOW DOES RISK MANAGEMENT WORK ?

Typically, the risk management process involves five steps: setting objectives, identifying risks, risk assessment, defining responses, and monitoring. Depending on the context, however, these steps may change significantly.

SETTTING OBJECTIVES

The first step is to define what are the main goals. It is often related to the risk tolerance of the company or individual. In other words, how much risk they are willing to take to move toward their goals.

IDENTIFYING RISKS

The second step involves detecting and defining the potential risks. It aims to reveal all sorts of events that may cause negative effects. In the business environment, this step may also provide insightful information that isn’t directly related to financial risks.

RISK ASSESSMENT

After identifying the risks, the next step is to evaluate their expected frequency and severity. The risks are then ranked in order of importance, which facilitates the creation or adoption of an appropriate response.

DEFINING RESPONSES

The fourth step consists of defining responses for each type of risk according to their level of importance. It establishes the action to be taken in case an unfortunate event occurs.

MONITIRNG

The final step of a risk management strategy is to monitor its efficiency in response to events. This often requires a continuous collection and analysis of data.