What is risk assessment?
Risk assessment refers to a systematic process that involves a series of steps for evaluating the potential risks that could affect a business’s operations. A well-defined risk assessment process helps in identifying hazards that could have a negative impact on an organization’s ability to conduct business. Furthermore, it also provides measures, processes, and controls to reduce the impact of these risks to business operations.
Key steps in risk assessment
Undertaking a risk assessment process can allow an organization to obtain a holistic view of the risks it faces, consequently allowing the management to identify these risks and capitalize on opportunities. Furthermore, risk assessment allows management to assess the company’s risks and controls and devote resources where needed. Here are the key steps in the risk assessment process:
Identify the risk
Risks affect a company’s ability to successfully compete within the industry, survive in the market, and maintain its financial strength and goodwill and also the overall quality of its products, services, and people. The first step enterprises must do is identify all the potential risks that could affect the smooth functioning of their business.
Create a risk library
A risk library acts as a framework for the risk assessment process. It is a repository that summarizes those risks to which the company is exposed. This facilitates discussions of risks and their definitions, and it promotes both consistency and a culture of risk awareness. A risk library can be broken down into four categories- insurance risk, market risk, operational risk, and strategic risk.
Assessing the likelihood of risk and the consequent financial impact and can help the management in determining whether the company is operating within its stated risk appetite and should accept, reject or reduce risk. The evaluation of each risk can be on either be quantitative or qualitative depending on the availability of information or the confidence in the approach.
Formulate and implement risk mitigation strategies
It is a good practice for companies to identify the risk owners in their organization. Risk owners are the most appropriate people to monitor and manage the risks. They are also responsible for assessing risks and identifying associated controls. In order to effectively mitigate risk, organizations must work with risk owners and identify current controls that are in place to mitigate and/or reduce risk.
Review and update the strategies
The market conditions can be highly dynamic, which makes it important for businesses to undertake risk assessment at fixed intervals, review their strategies with respect to the present conditions, and make the necessary changes in strategies. This step is also aimed at keeping track of the adherence to the strategies that were formulated earlier.