An Introduction to Risk

An Introduction to Risk

1. Risk Management

   • The process of managing the risk of individual activities. i.e. financial management, taxation, leadership, and identifying their impact to the overall sustainability of the business.
     • Management of risk is an integral part to good management
   • About seeking greater control in an uncertain environment

2. Main Elements of the Risk Management Process

   • Communicate and consult
   • Establish the context
     • Establish the external, internal and risk management context in which the rest of the process will take place.
   • Identify the risks
     • What can happen?  When and where?  How and why?
   • Analyse risks
     • Identify and evaluate existing controls
       • Determine consequences, determine likelihood and determine level of risk.
   • Evaluate risks
     • - Compare against criteria; and - Set priorities.
     • Treat risk?
       • No
         • Monitor and review
       • Yes
         • Treat risks
   • Treat risks
     • - Identify options; - Assess options; - Prepare and implement treatment plans; and - Analyse and evaluate residual risk
   • Monitor and review

3. What is risk?

   • Common feature is that risk is associated with change
     • Therefore a risk is any unintended or unexpected outcome of a decision or course of action
   • Three Components
     • Magnitude of Loss
       • Two forms of potential loss include, (i) an outcome that will make us worse off than some status quo position; or (ii) an outcome that is not as good as some other outcome that might have been obtained (an opportunity lost).
     • Chance of Loss
       • Chance of loss must exist.  If a loss is certain then the situation is no longer risky.
     • Exposure to Loss
       • The exposure to injury or loss implies that the decision-maker may be able to take steps to reduce or avoid the exposure.
     • Degree of risk directly proportional to each of the three components, and therefore the management of risk is given to reducing one or all of these components.
   • Any unintended or unexpected outcome of a decision or course of action

4. Speculative vs Pure Risk

   • Speculative risk is where the consequences of the risk taken can result in a gain, a loss or break-even
   • Pure risk is used to describe those situations that involve only the chance of loss or no loss

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