Back To Basics: Risk Management 101

 

 

Unless you have a crystal ball that can accurately foretell the future, it’s impossible to know with certainty what will happen ahead of time. The closest we can get to knowing if any untoward incidents will occur in the future is through risk assessment, an important tool in risk management.

Let’s discuss them by reviewing the basics, starting with a definition of terms.

What is risk?

Combining a specific hazard and its probability is essentially the definition of risk. Two people who are given the same data should be able to assess the information they were given and come up with the same result. They do this by using scientific methods and applying mathematical concepts.  Risk assessors see probabilities about situations they are monitoring. Simply put, (probability) x (hazard) = risk. These values must be known or estimated to enable us to define risk.

Risk can be estimated through any of the following methods, which can be used separately or combined together depending on the situation: historical data, modeling, event trees or fault trees, the use of analogy and a comparison with similar activities.

What is risk assessment?

It is the process of analyzing and evaluating potential risks involved in a projected activity or undertaking. The goal is to identify possibly hazards with the use of appropriate methods. Doing so allows us to provide alternative solutions that involves either or all of the following: eliminate, reduce or limit the likelihood or negative effects of the hazard from taking place.

Why is risk assessment important?

Risk assessment consists of these general steps:

1. Identifying the hazard.
2. Evaluating the link between exposure to a risk and its adverse effects.
3. Exposure assessment, or evaluating the conditions that lead to risk exposure.
4. Risk characterization, which involves the use of probability and statistical methods to describe what the adverse effects are and the likelihood of them occurring.

What is risk management?

It is the process of using the results of risk assessment methods to come up with decisions on how to address the identified risk. Risk management involves a larger decision making process that takes into consideration both the technical and social aspects of a particular situation.

Combining risk assessment with risk management involves the following steps:

1. Formulate or define the problem within a broader context. This can be done by answering the following questions: What is the problem? Who must manage the problem? Who are the stakeholders?
2. Execute a risk analysis. This involves determine the hazard, evaluating the likelihood of the hazard taking place and knowing any uncertainties that are factored into the estimates.
3. Define what your options are. You must determine any potential consequences, costs and possible benefits, if any.
4. Formulate sound decisions. After assessing risk, you can now determine the best solutions and how to best implement them, in cost effective and socially acceptable ways.
5. Implement your decisions. This means that you need to know the steps needed and find ways to deal with any objections.
6. Evaluate the steps implemented. This is where you determine what is acceptable and what was effective in the actions you’ve taken to deal with the risk.

Risk management is an important component to anticipating any possible future threats and coming up with sound decisions based on the methods and information you currently have. It will also help you make better decisions that will ultimately benefit everyone in the organization.