In the extremely volatile financial environment of today, risk management focuses on matters of insurance and is concerned with identifying potential risks, which may have a severe impact on a firm. Firms conduct risk management assessments in an effort to identify new ways of protecting their assets against sharp market fluctuations.

Originally, risk management was related to the acquisition of the proper insurance, which was offered in standardized forms, basically eliminating the need of risk management. Insurance was purchased to cover the cost incurred by fire, theft and liability losses. Over time, globalization and the increased volatility of financial markets has given birth to a great variety of risks, which can adversely affect organizations. This changed the concept of risk management radically, making it increasingly important.

Modern organizations use risk management as a common practice, particularly for any operation, which is related to financial or facilities management. However, risk management is not focused only on financial risks, but on a multitude of risks that may pose potential threats for a firm. In particular, some of the risks, which need to be alleviated or managed by risk management, are:

Financial risks: they are related to financial transactions. For example, if the organization plans to issue new bonds, it faces the risk of an increase in the interest rates before the bonds are brought to the market. Demand risks: they are related to the demand for the firm’s products or services. Given that sales profitability is particularly important for a firm’s viability, demand risks are very critical for the firm. Speculative risks: they are related to the speculations a firm makes in regards to potential gains from investment projects or marketable securities. Speculative risks are particularity important because they may incur gains and losses to the same extent. Liability risks: they are related to liabilities associated to the firm’s products, services or employees. For example, improper driving of corporate vehicles may incur huge costs for the firm. Property risks: they are related to the destruction of production assets from floods, fire and so on. Personnel risks: they are related to employee’s actions such as fraud, embezzlement, sex assaults and so on. Environmental risks: they are related to polluting the environment, an issue that has acquired increased public awareness and sensitivity in the last years.

Generally, liability, property, personnel and environmental risks are insurable risks, meaning they can be covered by insurance. However, in order to decide if a specific risk will be insured, managers need to evaluate all optimal alternatives. This is a major function of risk management, which facilitates the undertaking of optimal risk measures.

Organizations recurrently undertake a comprehensive assessment of potential risks, at least twice a year. The assessment is being performed by a corporate team comprising of staff members representing all the major functions of the organization.

A complete risk management assessment involves the following stages:

(a)    Identifying the risks

At this stage, risk managers identify the potential risks that may be a threat to the firm. It is important to understand, that risks should not be categorized only by how the industry insurance views them. Each firm performs different activities and undertakes different types of risk. On the other hand, insurance coverage includes a tiny set of risks that modern firms face. Therefore, risk managers should apply a holistic view of risk management to pursue effectively their business objectives. Such a holistic view encompasses risks, which are related to:

Business partners (interdependency risk, cultural conflict risk) Competition (market share, price war, industrial espionage) Customers (product liability, credit risk, lack of customer support) Distribution channels (transportation, service availability, cost) Financial operations (foreign exchange, interest rates, stock market) Operating activities (facilities, natural hazards) Human Capital (employees, independent contractors, training) Political conditions (war, terrorism, intellectual property rights) Regulatory & Legislative settings (antitrust, exporting licensing) Corporate reputation (corporate image, branding success) Strategic management (mergers & acquisitions, joint ventures, corporate agility) Technological issues ( complexity, obsolescence, virus attacks, hackers)

(b)   Measuring the potential effect of each risk

There are risks that are tiny and are not really posing any threat to the organization, while others may greatly impact organizational viability. Risk managers should be able to segregate risks by measuring their potential effect and then focus on the most serious threats.

(c)    Deciding on the appropriate handling of each risk

In most situations, risk exposure is anticipated and reduced by the use of several techniques. These involve, but are not limited to the following:

Transferring the risk to an insurance company: Depending on the nature of the risk, it may be to the firm’s best interest to transfer the risk to an insurance company and pay a premium for it. However, there are cases that self-insurance is less costly for the firm, which prefers to bear the risk directly instead of paying another party to bear it. Transferring the risk to a third party: This technique applies mainly to manufacturing firms that may undergo liabilities as a result of problems in their transportation fleet for example, which would have a huge impact on transferring the products from the manufacturing plant to various points across the country. In this case, the firm may contract with a trucking company to undertake the shipping, thus passing the risk to a third party. Purchasing derivatives contracts to reduce the risk: Firms use derivatives to hedge risks. For example, financial derivatives can be used to reduce risks that arise from interest rates and exchange rates changes. Reducing or eliminating the probability of occurrence of an uncertain event: The losses incurred by an adverse event are a function of the probability of occurrence and the dollar loss if the event occurs. In some instances, risk managers may reduce the probability of occurrence by taking appropriate risk measures. For example, to anticipate the demolition of property by fire, the firm may use fire-resistant materials in areas with the greatest fire potential. In other cases, a firm may discontinue a product or a service line if the risks associated outweigh the returns.

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