There are four ways of dealing with, or managing,
each risk that you have identified. You can:
¹
Accept it
¹
Ttransfer it
¹
Reduce it
¹
Eliminate it
For
example, you may decide to accept a risk because the cost of eliminating
it completely is too high. You might decide to transfer the risk, which is
typically done with insurance. Or you may be able to reduce the risk by
introducing new safety measures or eliminate it completely by changing the way
you produce your product.
When
you have evaluated and agreed on the actions and procedures to reduce the risk,
these measures need to be put in place.
Risk
management is not a one-off exercise. Continuous monitoring and reviewing is
crucial for the success of your risk management approach. Such monitoring
ensures that risks have been correctly identified and assessed, and appropriate
controls put in place. It is also a way to learn from experience and make
improvements to your risk management approach.
All
of this can be formalised in a risk management policy, setting out your
business' approach to and appetite for risk and its approach to risk
management. Risk management will be even more effective if you clearly assign
responsibility for it to chosen employees. It is also a good idea to get
commitment to risk management at the board level.
Contrary to conventional wisdom,
risk management is not just a matter of running through numbers. Though
quantitative analysis plays a significant role, experience, market knowledge
and judgment play a key role in proper risk management. As complexity of
financial products increase, so do the sophistication of the risk manager's
tools.
“Good risk management can improve the quality and returns
of your business.”
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