What is Risk Management and its Importance
The process of detecting, analyzing, and controlling threats to an organization’s capital and revenues is known as risk management. Financial uncertainties, legal obligations, strategic management failures, accidents, and natural disasters are only some of the dangers or risks that might arise. For digital businesses, IT security threats and data-related hazards, as well as risk management techniques to mitigate them, have become major priorities. As a response, organizations’ methods for recognizing and controlling risks to their digital assets, such as confidential corporate data, a customer’s personally identifiable information (PII), and intellectual property, are increasingly included in risk management plans.
Every business and organization confronts the danger of unanticipated, damaging occurrences that might cost the firm money or force it to close permanently. Organizations may use risk management to prepare for the unexpected by limiting risks and additional expenses before they occur.
A company may save money and preserve its future by establishing a risk management strategy and considering the different potential risks or events before they occur. Because a solid risk management strategy will always assist a firm in developing processes to prevent possible risks, mitigate their effect if they occur, and deal with the consequences. As a result, organizations can be more confident in their business decisions if they can recognize and handle risk. Furthermore, effective corporate governance rules that are mainly focused on risk management can assist a firm in meeting its objectives.
Further significant advantages of risk management also provide:
- Improves company operations’ stability while lowering legal liability.
- Provides a stable and sound environment for both the employees and the consumers.
- All concerned individuals and assets are shielded from potential damage.
- Assists in determining the organization’s insurance need to avoid paying excessive rates.
- Predictors against occurrences that is harmful to both the corporation and the environment.
It has also been highlighted how important it is to combine risk management with patient safety. Most hospitals and companies divide the risk management and patient safety divisions; they have different leadership, goals, and scope. Some hospitals, however, recognize that the capacity to deliver safe, high-quality patient care is critical to the protection of financial properties and, as a result, should be integrated with risk management.
Virginia Mason Medical Center in Seattle, Washington, incorporated risk management activities into their patient safety department in 2006, resulting in the Virginia Mason Production System (VMPS) management procedures. VMPS is committed to constantly enhancing the patient safety system via increased openness in risk reduction, disclosure, and reporting. Virginia Mason has seen a considerable decrease in hospital professional premiums and a significant rise in the reporting culture after introducing this new method.
Strategies and methods for risk management
Every risk management plans adhere to the same phases, which add together to form the entire risk management process:
Step 1 – Establish context to recognize the context in which the rest of the procedure will occur. The criteria that will be used to evaluate risk should also be stated and the framework of the analysis.
Step 2 – Identifying risks mean the company analyzes and specifies possible risks that might harm a specific corporate procedure or project.
Step 3 – Risk analysis is once particular categories of risk are recognized, the firm calculates the likelihood of their occurrence and the repercussions. The purpose of risk analysis is to understand better each instance of risk and its effect on its initiatives and objectives.
Step 4 – Assessment and evaluation of risks mean after assessing the risk’s overall chance of occurrence and its overall effect, the risk is further analyzed. Then, based on its risk appetite, the firm may decide if the risk is acceptable and whether it is prepared to take it on.
Step 5 – Mitigating risk: Businesses identify their top risks and devise a strategy to mitigate them via precise risk controls during this stage. These plans contain risk reduction methods, risk avoidance measures, and contingency plans if the risk occurs.
Step 5 – Monitoring the Risk is following up on both the risks and the overall strategy to monitor and track new and existing risks continuously, which is part of the mitigation plan. In addition, the whole risk management process should be evaluated and changed as needed.
Step 6 – Consult and communicate Internal and external shareholders should be involved in communication and consultation at each relevant phase of the risk management process and throughout the process.
People typically face increased health hazards as they become older. Managing pure risk includes recognizing, analyzing, and reducing these risks—a defensive technique to prepare for the unexpected. The fundamental risk management methods—avoidance, retention, sharing, transferring, and loss prevention and reduction—may be applied to various aspects of a person’s life and pay off in the long term. Here’s a look at these five approaches and how they may need them to control health hazards.
Avoidance is a risk-mitigation strategy that involves refraining from engaging in activities that might result in damage, illness, or death. One such behavior is smoking cigarettes, which may avoid reducing both health and financial hazards.
As per the American Lung Association, smoking is the most significant avoidable cause of death in the United States, claiming more than 480,000 lives each year. Furthermore, the Centers for Disease Control and Prevention emphasizes that smoking is the leading cause of lung cancer, and the risk only grows the longer individuals smoke.
On their end, life insurance firms reduce this risk by increasing rates for smokers vs. nonsmokers. Health insurers can raise rates depending on age, region, family size, and smoking status under the Affordable Care Act, often known as Obamacare. The law provides for a premium fee of up to 50% for smokers.
The acknowledgment and acceptance of a danger as a given are referred to as retention. This accepted risk is typically viewed as a fee to help offset more significant risks in the future, such as choosing a cheaper premium health insurance plan with a higher deductible rate. The first risk is having to pay higher out-of-pocket medical expenditures if health problems develop. If the situation worsens or becomes life-threatening, health insurance benefits are available to spend most of the expenses above the deductible. Suppose the individual does not have any significant health concerns that necessitate any additional medical costs for the year. In that case, they can avoid the out-of-pocket payments, avoiding the greater risk entirely.
Sharing risk is frequently accomplished through employer-based benefits that allow the firm to cover a percentage of the employee’s insurance costs. In essence, the risk is shared by the firm and all employees who participate in the insurance benefits. The assumption is that as more people share the risks, premium prices should fall correspondingly. Thus, individuals may find it in their best interests to share the risk by enrolling in employer-provided health care and life insurance policies wherever available.
Because the financial risks connected with health care are shifted from the individual to the insurer, health insurance usage is an example of risk transfer. Insurance firms accept financial risk in return for a charge known as a premium and a written contract between the insurer and the individual. The contract specifies all of the requirements and circumstances that must be met and maintained for the insurer to accept financial responsibility for paying the risk.
Accepting terms and conditions and paying the premiums allows an individual to shift the majority, if not all, of the risk to the insurer. Many statistics and algorithms are carefully applied by the insurer to correctly estimate the proper premium payments corresponding with the desired coverage. When a claim is submitted, the insurer checks whether the requirements for providing the contractual compensation for the risk outcome have been satisfied.
Loss prevention strategy seeks to reduce rather than eliminate loss. While recognizing the danger, it remains focused on containing the loss and preventing it from expanding. Preventative care is one example of this in health insurance.
Preventative care appointments, typically with no co-pays, are encouraged by health insurers so that members may obtain yearly checkups and physical examinations. Insurers recognize that detecting possible health concerns early on and providing preventive treatment can help reduce medical expenses in the long term. Many health plans also offer gyms and fitness clubs discounts as an additional way of prevention and reduction to keep members active and healthy.