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What is Risk Management?

August 16, 2023

Risk management involves the identification, assessment, and prioritizing of risks, which enables organizations to mitigate the impact of uncertainties on their business. By implementing risk management strategies, businesses and organizations in Kenya can effectively minimize the negative consequences of potential risks.

All businesses carry some level of risk. The practice of risk management involves identifying potential threats that could negatively impact the business and developing strategies to minimize or eliminate these risks. By implementing risk management strategies, businesses can proactively address potential problems and safeguard their operations.

A risk assessment is conducted in order to determine whether there are any significant threats or opportunities present within an organization’s environment that could impact its performance if not managed effectively.

An effective risk assessment should take into account internal and external factors, including market conditions and technological advancements, that may affect a business strategy. By identifying potential opportunities and threats, businesses can develop mitigation measures such as purchasing insurance policies to minimize the impact of risks. This comprehensive approach to risk assessment enables businesses to make informed decisions that lead to long-term success.

Why is Risk Management Important?

Risk management is important because it helps to ensure that risks are identified and managed appropriately. It also helps to identify and manage risks that may be hidden or not obvious. It ensures that the right controls are put in place to manage the risks.

Risk management offers numerous benefits for businesses. Some advantages include:

  • Reducing losses: Risk management helps businesses mitigate losses that may result from unforeseen events or risks.
  • Increasing stability and flexibility: Implementing risk management strategies can make a business more stable and adaptable in the face of changing circumstances.
  • Lowering insurance costs: By reducing the likelihood of risks, risk management can lower the cost of insurance premiums for a business.
  • Saving time, money, and resources: Effective risk management can help businesses avoid costly mistakes, saving them time, money, and resources in the long run.
  • Protecting against future losses: By identifying potential risks and implementing mitigation measures, risk management can help protect a business from future losses.

The entire scope of risk management for any business starts with assessment of the risks and includes:

  • Risk Identification
  • Risk Analysis
  • Risk Evaluation
  • Risk Control
  • Risk Monitoring and Review

What is Risk Assessment?

Risk assessment is the process of identifying and evaluating risks. The main goal of risk assessment is to determine the likelihood of an event occurring, as well as its impact on the organization if it does occur. Risk assessments should be carried out at all levels of an organization, from strategic planning down through daily activities such as purchasing or receiving goods and services.

Risk assessments can be performed manually or automatically (i.e., through computer software). In either case, there are three major steps involved:

  • Identification – Determining what assets need protection
  • Evaluation – Quantifying potential losses that could result from events affecting those assets
  • Control measures – Selecting appropriate responses based on identified threats

Types of Risk Assessment

Qualitative risk assessment is a non-quantitative approach to estimating risk. It involves assigning probabilities and impacts to events, such as the occurrence of natural disasters or human error.

Quantitative risk assessment uses tools such as simulations and mathematical models to predict future outcomes. For example, you can use quantitative methods to calculate how much money will be lost if your business suffers from cyber-attack or fire damage.

#1 Risk Identification

When you begin to identify the risks that exist in your organization, it’s important to remember that there are many different types of risks. These include:

  • Financial
  • Operational
  • Reputational and brand-related

How to Identify Risks?

Identifying risks is the first step in risk management. There are many ways to do this, including:

  • Brainstorming with your team members, or even just yourself, about what could go wrong.
  • Looking at past incidents and investigating why they happened so that you can learn from them and prevent similar incidents from happening again in the future. This is called lessons learned analysis or LLA.
  • Reviewing policies and procedures for any gaps or areas where there may be a high likelihood of risk occurring due to poor procedures or other issues related to how things are done at work (e.g. neglect of warehouse safety protocols by employees).

Aside from the techniques mentioned above, businesses may also use tools such as checklists, questionnaires, and surveys to identify risks. However, these tools may not always be effective because they lack context around the underlying reasons for certain events.

While they provide an overview of what happened, they fail to provide additional insight into the root causes of those events or what steps can be taken to prevent them from recurring in the future. As such, businesses should be cautious when relying solely on these tools and consider supplementing them with more comprehensive risk management strategies.

#2 Risk Analysis

Risk analysis involves a comprehensive evaluation of the potential impact that a risk event could have on an organization. This process entails assessing the probability of a risk event occurring and analyzing its potential consequences, as well as determining whether it is necessary to mitigate or accept the risk. Based on the results of this analysis, organizations can determine the extent to which each risk should be addressed, if at all. By undertaking risk analysis, businesses can prepare themselves for potential disasters and ensure their continued operations even in the face of adversity, or at least minimize the damage incurred.

#3 Risk Evaluation

Risk evaluation involves analyzing the likelihood of a risk occurring and the potential impact it could have if it does. This process helps to determine the overall level of risk associated with a particular activity or situation. By evaluating risks in this way, businesses can make informed decisions and implement appropriate risk management strategies to mitigate the potential negative consequences.

#4 Risk Control

Risk control is the process of taking action to reduce the likelihood or impact of a risk event occurring. Risk control can be achieved through four main techniques:

  • Risk Avoidance: This technique involves avoiding the risk altogether by eliminating the source of the risk or changing the business operations to minimize the likelihood of the risk occurring. For example, you might change where you purchase raw materials for your product so that it no longer comes from areas where there’s a high risk of conflict between local communities and farmers over land use rights or pollution from industry-related activities such as mining operations.
  • Risk Transfer: In this technique, a business transfers the risk to another party, such as an insurance company or a vendor. This technique is often used for risks that are difficult to control or manage on its own. For example, a company may transfer the risk of property damage caused by natural disasters to an insurance company.
  • Risk Mitigation: This technique involves reducing the likelihood or impact of the risk through various measures. For example, a construction company may mitigate the risk of their worker’s injury by implementing safety protocols and providing safety equipment and conducting regular safety training.
  • Risk Acceptance: This technique involves accepting the risk and its consequences. It is often used for risks that are minor or have a low likelihood of occurring. For example, a company may accept the risk of one of several employees leaving mid project.

#4 Risk Monitoring and Review

Monitoring is the process of assessing the status of risks identified and reviewing whether the risk control measures are working.

Reviewing is done periodically to ensure that all identified risks have been assessed, and that appropriate action has been taken to manage them.

Some Risk Management Stakeholders in Kenya

  • The National Disaster Management Authority (NDMA) which provides policy advice on national disaster preparedness.
  • The Kenya Red Cross Society (KRCS), an independent humanitarian organization that promotes health & safety through training programs
  • The Ministry of Health (MOH) whose mandate includes providing healthcare services through health facilities located across Kenya’s 47 counties

Embrace Risk Management in Kenya for Long-Term Business Success

Risk management is a crucial component of any successful business in Kenya. By identifying potential risks early on and implementing effective mitigation strategies, businesses can minimize the likelihood of experiencing adverse events that could lead to financial loss or other problems. By prioritizing risk management, companies can safeguard their operations and position themselves for long-term success in an ever-changing business environment.

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