Risk Management Process

Understanding the importance of a risk management process and insurance

 Risk Management Process by WTW Network Insurance Broker

Finding a balance between risk and reward is a continual challenge for every business. Below we take a look how a risk management process can add value


What is a risk management process?

No business can be successful without taking risks, the question is how much risk can you accept in order to achieve your strategic objectives? A risk management process is the framework of identifying, evaluating and controlling potential threats to the business. It involves a systematic approach to understand potential threats, evaluate their likelihood and potential consequences, and develop effective strategies to manage or mitigate them.

The importance of a risk management process

Effective risk management enables businesses to identify and prepare for potential risks that could disrupt their operations. By implementing proactive measures, businesses can minimise the impact of unforeseen events and ensure continuity. An efective risk management process will provide decision-makers with valuable insights into potential risks associated with various courses of action. The results can enables informed decision-making by considering risks, rewards, and potential trade-offs. 

Risk management process

Why is risk appetite an important part of the management process?

Identifying your risk appetite is an important step in the risk management process and will also assist with strategic and operational decision making. It goes to the centre of the business and will impact how you deal with customers, employees, regulators and shareholders. When risk appetite is clearly understood and communicated, it becomes a powerful tool not only for managing risk but improving performance. 

Does our business need a risk management framework?

A risk management framework will identify and manage risks that can prevent the business from meeting its strategic objectives. Whereas, business insurance is an effective means to transfer unacceptable risks. Mistakes and accidents will invariably occur and can be very costly and time consuming. Considering what risks have the potential to throw your business off track, could mean the difference between success or failure.


How does a risk management process work?

A risk management process can ensure you achieve your objectives without taking unnecessary risks. The development of a risk management framework will assist your business understand its risk appetite. Communicating that message to your staff will set the tone and form an important part of your company culture.

1. Identify your risks

The first step of a risk management process is to investigate and detail risks that might affect your business or objectives. There are a number of risk management tools available such as risk assessments and risk reviews that can assist with identifying and recording risks.

2. Analyse and measure

The second step of a risk management process is to determine the likelihood and consequence of each risk. By evaluating each risk, it is possible to quantify the potential to impact your business or objectives. A risk register is a valuable risk management tool to record and score the potential risks.

3. What is unacceptable

The third step of a risk management process is to take decisions concerning which risks are unacceptable compared with your risk appetite. Risks that are acceptable should be monitored and reviewed on a regular basis. Whereas risks that are unacceptable should either be avoided, reduced or transferred.

4. Mitigate or transfer

The fourth step of a risk management process is to action risks that cannot be avoided should either be reduced or transferred to an acceptable risk tolerance level for the business. You should consider ways to mitigate the exposure by transfering unacceptable risks from your balance sheet.

5. Contingency planning

The fith step of a risk management process is to consider risks that cannot be managed. If your initial plan to control the risk fails, what is your plan B? For example, in the event of a cyber breach, what are the steps to effectively respond and mitigate the impact after the incident has occurred?

6. Monitor and review

The sixth step of a risk management process is to continually monitor, review and report on risks to your business and objectives. The risk management framework does not finish once the risks have been identified, analysed and controlled. Your business and its objectives will continue to be exposed to new and emerging risks.

What risk management process tools are available?

An effective risk management process will identify and manage risks that can prevent the business from meeting its strategic objectives.
Decisions will need to be made with respect to which risks are acceptable, which risks you can mitigate, and which risks you decide to transfer. Meeting your growth targets will often take up the vast majority of your time and focus. However, business success will rarely come without having to overcome a few challenges along the way. The below are commonly used risk management process tools to monitor and report on risks within your organisation:

 Risk Assessments

Risk Assessments

Are completed per activity, with the aim to identify hazards and risk factors that have the potential to cause a harm and evaluate the risks.

 Risk Register

Risk Register

Identifies key areas of risk in terms of potential frequency and impact, highlights issues that require attention and allocates responsibility.

 Business Continuity Planning

Business Continuity Planning

A business continuity plan will be business specific and identify responsibility with a crisis management hierarchy should an incident occur.

An effective risk management process will utilise business insurance to transfer risk

Talk to an insurance broker today about your risks and the insurance products available

Improve your risk management framework

Risk process reviews - a comprehensive review of the risk management plan and process can offer an independent review of your ability to accurately identify, measure and control risk. Reviews can be carried out at a single location or across different locations of your business to identify any inconsistencies that might increase risk levels.
Management and board reviews - an independent review of the board, management structure, risk management framework, and the individual skills and behaviours of the management team, can provide a valuable insight. Findings can be reported to identify solutions for optimising structures, practices and resources.
Claims or incident reviews - a comprehensive review of large losses and claims histories can identify a range of preventative measures to reduce the risk of incidents reoccurring. An independent review will often be able to report a range of solutions that combine risk management with your business insurance.
Organisational learning - key issues can be identified to ensure your organisation can deliver on its risk management strategy. Findings can be reported to identify any structural, process and behavioural changes required. New strategies can be developed to ensure risk management is embedded within your organisational culture.

 Risk management process in business

Risk management process with business insurance

When risks that have the potential to cause a significant financial impact but the chance of occurring is low, they are best transferred from your balance sheet. Without commercial insurance, companies would be required to maintain increased capital reserves to protect against unforeseen events. The pooling of insurance premium therefore provides an effective risk management framework to spread the cost and reduce the financial impact.


Safety risks

Your risk management process should appreciate you have a legal obligation to take reasonable steps to prevent accidents or harm to your employees. The Health and Safety Executive offers a useful guide to your obligations required under UK law, including undertaking a risk assessment and purchasing employers liability insurance. If your business interacts with members of the public, you also have a duty of care to maintain a safe environment. This will include any customers, suppliers and contractors. You do not have a legal requirement to purchase public liability insurance, but it is commonly purchased to mitigate the cost of potential compensation claims. Dependent upon your business activities you may have additional safety risks you need to consider. For example, the use of industrial machinery and engineering inspections.


Financial risks

Your should make sure you have sufficient cashflow to manage your operation and pay your debts is critical to the success of your business. The liquidity of your business will allow for you to meet your obligations and further invest in delivering on your strategic objectives. Your risk management strategy should consider potential shocks to your cashflow that may require significant outlays. This could include high value customers not meeting their obligations under contract or civil ligation against your business for a breach of their professional duty. Surety bond insurance can assist your business with customers which are unable to make payment. Whereas, professional indemnity insurance can offer servcie providers protection against legal costs incurred in defending allegations and will pay any damages awarded.


Regulatory risks

Your risk management process should appreciate there are around 90 regulators in the UK with ranging roles and responsibilities, from protecting consumers and promoting the effective functioning of markets to wider responsibilities around the environment and safety. Regulators are increasingly active in pursing businesses that do not comply with their legal requirements. Many businesses believe they are too small to become the target of regulatory investigations, fines or penalties. However, your risk management strategy should accept that regulators will pursue wrongdoing no matter the size of the organisation. Directors and officer’s insurance can offer protection against civil, criminal and regulatory proceedings for individuals while acting in a managerial capacity on behalf of the company. Whereas, corporate legal liability offered under a management liability policy can protect the business from civil litigation and regulatory investigations.


Security risks

Technology can offer wide range of benefits from improved productivity, flexible working to reduced costs. However, in an increasingly digital world your risk management strategy should consider your reliance and exposure to security risks. Data breaches and cyber attacks are increasing in terms of size and frequency. Any risk management strategy will need to take into account cyber security, cyber insurance and contingency planning. Cyber security insurance can offer protection and access to specialists to assist with mitigating the damage of security and privacy breaches. Whereas, crime insurance can offer protection from the theft of property and money.


Property risks

Your risk management process should take into consideration the assets that your business owns can be tangible goods, such as vehicles, buildings, computers, stock, or intangible items, such as intellectual property. A risk management strategy should consider your acceptable risk level of damage to your business assets. Fires, floods, explosions and riots, are just some of the risks your business assets maybe exposed. Property damage insurance under a commercial combined insurance policy can protect your company’s buildings and contents against loss or damage from a range of insured perils. Consideration should also be made to business interruption insurance that protect against the loss of income from being unable to trade.