An organization hires a risk management specialist to manage its exposure to various operational risks that can result in asset damage or loss, as well as the ability to maintain operational cash flow. This expert first identifies all potential risk exposures before deciding whether the company should completely avoid those risks or how to fund the resulting losses. The risk management specialist’s primary responsibility is to safeguard the organization against unintentional losses that result in physical damage to the organization’s assets or financial losses as a result of injury or damage to third parties. Accidental asset loss or liability to third parties is a risk that all businesses face.
The first step in the risk management process is to identify all potential areas of loss for a company. For example, when it comes to physical assets like real estate or personal property, he or she should think about what might cause damage. Fire and theft are two common sources of loss.
In terms of liability, the risk manager should think about how the company’s operations might cause injury or damage to third parties. If the company owns cars, there is a risk of collisions, which creates liability. In the case of a manufacturer, the most significant source of liability risk is its product. To manage the outcomes, the risk management specialist must first identify all of these exposures.
Finding a solution to these exposures is the second step in the risk management process. Aside from avoiding the exposure entirely, which may be impossible in some cases, the risk management specialist must figure out how to cover potential losses. The use of insurance is a common technique, but the risk management specialist must weigh the cost of insurance against the benefit or likelihood of loss. One solution is to use deductibles or self-insured retentions to balance the use of insurance and self-funding. The risk management professional’s primary responsibility is to determine the ideal amount to be retained and transferred.
The final step in the risk management process is to put the chosen program into action. The assistance of a risk analyst is helpful in evaluating the cost and benefit of each risk management technique in larger organizations with more than one person dedicated to risk management. Senior management places a lot of weight on objectively measured successes and outcomes when it comes to supporting a risk management technique and the role of the risk management function. As the company’s operations change, the chosen techniques will need to be adjusted to meet the organization’s needs. Furthermore, the insurance market continues to go through business cycles, which will have an impact on funding decisions.