Risk Management

The identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks. An organization may use risk assumption, risk avoidance, risk retention, risk transfer, or any other strategy (or combination of strategies) in proper management of future events.

Traditional risk management, sometimes called “insurance risk management,” has focused on “pure risks” (i.e., possible loss by fortuitous or accidental means) but not business risks (i.e., those that may present the possibility of loss or gain). Financial institutions also employ a different type of risk management, which focuses on the effects of financial risks on the organization. For example, interest rate risk is a bank’s most important financial risk, and various hedging tools and techniques such as derivatives are used to manage banks’ exposure to interest rate volatility.

Risk Management Process

The process of making and implementing decisions that will minimize the adverse effects of accidental business losses on an organization. Making these decisions involves a sequence of five steps: identifying and analyzing exposures to loss, examining feasible alternative risk management techniques to handle exposures, selecting the most appropriate risk management techniques to handle exposures, implementing the chosen techniques, and monitoring the results. Implementing these decisions requires performing the four functions of the management process: planning, organizing, leading, and controlling resources.

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