Concepts of Risk management

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Table of Contents

Introduction
Background To The Study
Research questions
Objectives of the study
Literature Review
Research Methodology
References

Introduction

Risk management is an issue that is seen to cause a lot of concern all over the world. It governs all dimensions of life and this is partly the reason why everybody seems to be interested in it. In business however, it requires more than mere mentioning. It is an issue that needs to be clearly understood and its importance recognized by all.

Background To The Study

This proposal is an attempt to dig dip into the interesting topic of risk management. It seeks to clearly elucidate and dissect the concept of risk management so as to bring up its relevance not only to business operations but to other interested parties as well. No business can competitively survive in the present business world order without a proper risk management strategy in place.

In any case, research has proven that most businesses that lead the market are those that have instituted concrete measures of dealing with potential risks. The study is therefore part of the combined effort to elucidate the aspect of risk in a clear and lucid manner so that its importance is well understood and appreciated.

Risk management is a topic that has spurred a lot of discussions and debates in recent times (Ridley, 2007). This is partly because in an increasingly dynamic and competitive world such as ours, the concept of risk becomes indispensable. Risk management has grown to be an important subject of consideration in any business undertaking in contemporary times.

This has therefore created the need for a thorough study and understanding of the concepts of risk and risk management. Studies have therefore been conducted and many opinions and suggestions have been put forward as contributions to the topic. Today many businesses will normally have a whole department dealing with risk management.

In common business parlance risk refers to the likelihood of a loss occurring. Such a loss or losses might be detrimental to the performance of any business establishment (Arthur, 2006). This has therefore created the need to study such risks, classify them into categories, assess them and formulate possible avenues of addressing them. That is what risk management entails.

Risk management is therefore the process of recognizing, classifying, assessing and finding ways to mitigate or totally eliminate risks (World Bank, 2009). Business operations all over the world are faced with myriad risks and challenges that from time to time hamper their operations.

Such risks range from natural catastrophes such as earthquakes to human causes such as infernos and conflagrations. As a business manager, one is expected to be quite awash with relevant knowledge regarding the risks that are inherent in the environment within which the business operates.

Research questions

This study will therefore be an attempt to answer the following questions:

What risk management strategies do businesses employ?
Do the businesses develop a risk management plan to deal with risks?
Which risks affect the operations of the businesses?
How many businesses have functional risk management departments?

Objectives of the study

Considering the above research questions, this study will be conducted in light of achieving the following objectives:

To find out whether business people are aware of the risk management strategies. This is quite important as it will give the researcher a deeper understanding into the concept of risk management and how it is understood by the market players.
To suggest the various methods of risk management that can be employed by business people to manage the risks. This is only achieved after a thorough analysis and finding out the various measures that are in place for dealing with the risks that are inherent in the operations of businesses.
To clearly show the relevance of instituting risk management departments in the businesses. This will be presented in the form of suggestions and recommendations that may be adopted by any manager seeking to effectively control the risks in their organization.

Literature Review

Many studies have been conducted to the effect of risk and risk management and this has seen volumes and volumes of literature churned out day by day.

This large volume of literature has basically tried to explain and present all the issues governing risk management. While it may be agreed that risk management is a relatively new issue compared to other facets of business, it must be taken in mind that it has gained much dominance in the last few years.

The concept of risk management majorly arose in the 1970s when many issues arose as regard the insurance industry and the need to protect businesses against the losses and the disasters that were evident hitherto (Wilson, 2007). Insurance is perhaps the oldest method of risk management that is still in much use today (Lee, 2008).

The history of insurance dates back to the early Chinese merchant traders who would pull together parts of their goods into a pull with the hope assuaging any malady that may crop up (Gollier, 2006). Insurance is the contractual agreement whereby one party, the insurer agrees to indemnify another party referred to as the insured upon the occurrence of a particular risk (Hopkin, 2005).

The insured is normally expected to periodically pay a consideration called the premium that is calculated by the insurer as a function of various issues such as the likelihood of the risk occurring and the frequency of the occurrence of that particular risk (Hubbard, 2008).

Many businesses may not survive without a proper risk management strategy in place. For instance banks loan out a lot of money to the public for investment and other activities. It has been seen that many people default paying such loans.

This becomes very tricky for the banks since the money they loan out mostly comprises of savings that are kept by the same public. As a result banks insure the money they loan out so that in cases of default, they can recover compensation from the insurers (Branwell, 2001).

A risk management plan is a strategy that outlines a business’s response to the concept of risk management (Richer, 2005). It usually spells out the strategies that the business uses to agree the risks that face it. Studies have indicated that it is now a common practice for many businesses all over the world to draw up a complete risk management plan (Edwards & Wish, 1999).

It has also been shown that such plans are drawn by risk managers who are usually well versed in issues of insurance, investment, finance, and other relevant disciplines that revolve around business management (Casseley, 1995). Several models have been put forward as possible ways to develop a viable risk management framework.

A risk management process model is a cyclic framework that develops a continuous strategy for addressing risks in a business. The process starts by defining the function and the risk in question (Mayo, 1991). All the possible mechanisms are then developed to address the risk(s) that have been identified.

Thereafter the vulnerabilities and the challenges expected are identified so that possible measures can be taken to counter them. The final stage involves putting the system in motion so that its functionality can be seen. The United States department of defense uses an elaborate risk management plan that focuses on the wide array of risks that are usually realized by the department (Welsh, 2001).

It is a process that begins by identification of all the risks before a thorough analysis is undertaken to seek ways of addressing them. This then creates the need for mitigation measures to be developed so that the risks are managed. Developing a risk management strategy is therefore a process that needs to be undertaken by competent people who must be well aware of all the issues that pertains thereof (Danes, 1997).

As globalization gains roots across the world and trade liberalization thrives, new challenges and risks emerge (Hopkins, 2004). Today, it is common to see multinationals operating in different locations around the world several miles from their home countries.

Such businesses operate in totally different cultures and jurisdictions that pose so many challenges and risks previously unknown. This has created the need for such businesses to adopt efficient strategies to combat such risks (Branson & Loudon, 1998).

Any operational business is faced with three types of risks i.e. business, process and strategic risks (Warren, 2005). It is further seen that risks can only be addressed if they have been identified. Contrary to popular belief, insurance is not the only avenue of addressing risks. The risks that a business face can be managed thorough a number of ways. Risk avoidance involves shunning the cause of the risk altogether (Paddy, 2008).

For instance if you realize that a particular business venture is inundated with many risks, you avoid that venture and find other less risky ones. This clearly demonstrates that avoidance is not a good risk management strategy at all. Risk-averse people tend to avoid risks thereby limiting their chances of success since business success is normally a matter of taking chances and risks.

Risk reduction is another method of managing the risks that face a business. Reduction entails taking measures that are intended to reduce the chances of a particular loss occurring (Hotlings, 2008). For instance, the use of safety belts in motor vehicles is a reduction strategy that is intended to reduce the amount of injuries in case of an accident.

Businesses all over the world institute safety measures that usually help to reduce their risk exposures. Another common type of risk management strategy is risk transfer. Risk transfer is where one party pays a consideration known as a premium so that it transfers particular risks to another party (Berry, 2000). Insurance is the common method of risk transfer.

Insurance operates under the law of many numbers where little contributions are gathered into a common pool so that incase a loss befalls one party, compensation is easily paid to the party from the common pool (Denell, 2008). Few businesses also employ a strategy called risk retention to address their risks.

This is only common where few or low damage losses are anticipated from the occurrence of the risks. In this process, businesses will create its own pool of funds from which it will manage any loss that arises in the course of operations (Gollard, 1997).

Research has shown that the number of risks that business people face continue to grow day by day (Brown, 2007). What may not be a source of risk today may end up being risky tomorrow. As such, the strategies and the methods that are used to address these risks need to be reviewed on a constant basis. Certain risks that were not insurable in the past are own finding their way into the insurable bracket (Cordata, 2009).

It is not uncommon to find many insurers today selling policies that promise to insure against earthquakes which previously was not insured (Cramer, 1994). Farmers can now insure against loss that arises out of changes in weather patterns that affect their produce.

This shows that risk management is a very dynamic aspect in management that requires constant reviews not only on the actions on the ground but also on the literature that provides this information (Larry, 2006).

A lot of information on risk management exists. This is the information that is usually depended upon in making the decisions relating to risk management. It is therefore of dire importance that this information be updated as fast as the changes in the field of risk management are realized.

However, considering the nature of risk management and the challenges and opportunities that crop in daily in the world of business, much of this literature becomes irrelevant for any meaningful decision making on risk management (Blundell, 2008). This study is therefore an attempt to fill part of the gap that exists.

While one might argue that a lot of information is always at the disposal of decision makers, such arguments cease when one is confronted with the realities that face businesses today. The study will therefore methodically dissect the whole subject of risk management and bring the reader up to date with the latest developments in the murky waters of risk and risk management.

In light of analyzing the above issues, the study will base its findings and theories on the latest occurrences that have been realized and the manner in which risk is considered and managed across the world. The study will offer its recommendations in a clear manner so that they can effectively be adopted by any interested decision makers and anyone seeking the latest findings in this field.

A business that hopes to survive in the dynamics of modern day competition must have a well staffed and functioning risk management department. This department is responsible for identification of all the risks that the particular business faces. The department further develops a risk management plan for the business.

This is the strategy that outlines the measures that are employed by the business to address all the risks that the business faces. The plan also spells out the recommendations that should be undertaken by the management in addressing the risks that come up daily. As such, it is therefore important that businesses regard their approach to risk management with a lot of concern and commitment.

Research Methodology

This explains the manner in which the research will b conducted and present. It therefore comprises of the research design, the population involved in the study, the sampling techniques, methods of collecting data and the manner in which the data will be analyzed.

Research design

The study is about the emerging field of risk management and how businesses respond to and manage the risks that face then in their operations. As a result, the study will be designed to achieve the objectives spelled out by the researcher.

Population

Since the study is mostly limited to business people and their approach to the concept of risk and risk management, these people will form bulk of the population that is targeted in the research study. However, since risk management does not only exist in the business parlance, other stakeholders in business like consumers will also be encompassed by the study.

Sampling and sampling technique

From the targeted population given above, it is clear that not all the population can be relied upon as a source of data in the research study. The research will therefore adopt a survey kind of approach where sample will be drawn from the population from whom the required data will be obtained.

The researcher will use the stratified method of sampling to obtain a sample of 120 people of whom 80 will be business people while the rest will comprise of other stakeholders in business. It is believed that this will provide a far ground in obtaining the relevant information from all the parties.

Data collection

Since the study seeks to find ways in which business people approach the concept of risk management, primary data will highly be relied upon as source of data. Much information will therefore be obtained from the ground through collecting it from the relevant people.

However, secondary data as a source of data cannot be overlooked. In spite of the limiting factor that much of the existing information is out-dated, the researchers have clearly tries to find very important information that exists from secondary sources. Much information will therefore be obtained from books, journals and other written and audio-visual sources.

Data collection methods

The researcher will administer questionnaires to the respondents. These questionnaires will be structured in nature and will comprise of three sections. The first section of the will contain the questions that will be geared towards answering the first two questions enumerated in the research questions while the last two sections will contain responses to answer the last questions in the research questions above.

Some of the structured questions will be close-ended in nature such that the respondents will be required to tick the appropriate responses from the options availed. The remaining questions will be open-ended in nature in which case the respondents will be required to give their opinions as regards the issues addressed.

The researcher will also interview the sample population to obtain their perception of the whole issue and to reach those busy business people who may not have time to fill the questionnaires.

Data analysis

The data obtained will be analyzed using statistical methods. The researchers will use both the univariate methods and correlation methods in the analyses. Much of the responses obtained will be analyzed into percentages and fractions from which comparisons can easily be made.

The researchers will also use the computer software SPSS in the analysis of the data obtained. It is hoped that such an analysis will help synthesize the findings so that they can be well understood even by the layman in risk management.

Limitations

To obtain accurate information, it is important that the study be conducted in a wide area and for a long period of time. However, since that may involve a lot of expenses and money, the research will be limited to only three regions where the researcher could manage. It therefore means that the findings will not be reflective as such.

It is also sad to admit the secondary data that will be relied upon in the study in the very information that has been found to be out of date with the latest developments in the field of risk management.

References

Arthur, W. (2006). Risk Management and Insurance. Boston: McGraw Hill.

Bank, W. (2009). Banking and Financial Risk Management. Washington DC: World Bank.

Berry, J. (2000). Risk Management. London : Hienemann Books.

Blundell, T. (2008). Risk Management. Ottawa: Prentice Hall.

Branson, J., & Loudon, S. (1998). Challanges and Risks in Business. Princeton : Princeton University Press.

Branwell, M. (2001). Risk Management in a Global Perspective. New York: Paragon Books.

Brown, T. (2007). Insurance Principles. London: Kogan Books.

Casseley, D. (1995). Facing Up The Risks. New York : Roberts Books.

Cordata, D. (2009). Introduction To Insurance and Risk Management. Washington DC: Petersons.

Cramer, P. (1994). Business in A Changing Environment. Stockholm: Pinnacle Books.

Danes, M. (1997). Risk Management:A Global Need. Toronto: Oxford University Press.

Denell, W. (2008). Risk Management and Insurance. London : O Mara Books.

Edwards, B., & Peter, W. (1999). Managing Risk In a Competitive World. Cambridge: Cambridge University Press.

Gollard, C. (1997). Fundamentals of Risk Management. Seattle: Wanton Books.

Gollier, C. (2006). To insure or not to Insure. Geneva : Geneva Papers.

Hopkin, P. (2005). Fundamentals of Risk Mangement. New York: Prentice Hall.

Hopkins, T. (2004). Globalisation and Trade Liberilisation:Issues and Perspectives. Philadelphia: Madison Publications.

Hotlings, J. (2008). Implementint a Risk Management Strategy. New York : Wesley Books.

Hubbard, D. (2008). The Failure of Risk Management. London: John Weley.

Larry, J. (2006). Insurance. Oxford: Oxford University Press.

Lee, L. (2008). Insurance law on the Peoples Republic of China. Gouanzouh: Tejan Books.

Mayo, D. (1991). Risk Management. New York: Oxford University Press.

Paddy, R. (2008). Risk Management. London: Cambridge University Press.

Richer, J. (2005). Insurance and Risk Management. London : Oxford University Press.

Ridley, J. (2007). Risk Management. Oxford: Hienemann.

Warren, M. (2005). Risk Management and Corporate Strategy. New York: Prentice Hall.

Welsh, S. (2001). The US and Risk Precautions. Global Americana , 23-25.

Wilson, D. (2007). Corporate Financial Risk Management. New York: John Wiley.

World Bank. (2009). Banking and Financial Risk Management. Washington DC: World Bank.

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