- What is a risk management process?
- How does a risk management process work?
- Why is risk appetite important?
- How to develop a risk management strategy?
- Why risk transfer is important?
- What risk management tools are available?
- What risk management services can you offer?
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.
How your business decides to approach and manage potential risks can often be the difference between success and failure.
An effective risk management strategy 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.
What is a risk management process?
A risk management process is the framework of identifying, evaluating and controlling potential threats to the business. It will consider different strategies to address risks within a tolerance level acceptable to the business.
How does a risk management process work?
All risk management processes follow the same principles, that enables your business to manage uncertainty in an effective and systematic way.
> Identify risks to your business
- 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 & recording risks.
> Analyse and measure the impact
- Once risks are identified you can seek 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.
> Decide which risks are unacceptable - Make 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.
> Mitigate or transfer any unacceptable risks
- Risks that cannot be avoided should either be reduced or transferred to an acceptable risk tolerance level for the business. Consider ways to mitigate the exposure including the use of business insurance
to transfer unacceptable risks.
> Contingency planning - Should be considered for 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?
> Monitor and review regularly - Continually monitor, review and report on risks to your business and objectives. The risk management process 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.
Why is risk appetite important?
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. An effective risk management process can protect your organisation against financial shocks, improve decision making and optimise operational efficiency.
The Institute of Risk Management
(IRM) is the leading body for professional enterprise risk management and have produced an insightful paper on Risk Appetite & Tolerance
How to develop a risk management strategy?
The development of a risk management strategy 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.
The below identifies key topics that businesses should identify and evaluate when developing their own risk management strategy:
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 within your risk management strategy. For example, the use of industrial machinery and engineering inspections.
Making 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 protection against legal costs incurred in defending allegations and will pay any damages awarded.
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 insurance policy can protect the business from civil litigation and regulatory investigations.
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. Businesses should consider their approach when it comes to cyber security, insurance protection and contingency planning.
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 and both covers can be combined under a cyber crime insurance policy.
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.
Why risk transfer is important?
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 business insurance, companies would be required to maintain increased capital reserves to protect against unforeseen events. The pooling of insurance premium therefore provides an effective means to spread the cost and reduce the financial impact.
Other risk transfer mechanisms can include, indemnification agreements, sometimes referred to as hold-harmless agreements, used to transfer risk of loss, damage or liability via a contract from one party to another.
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The below are commonly used risk management tools to monitor and report on risks within your organisation:
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 risk associated with that hazard.
Risk Reviews - Are completed with a view across the entire company, with the aim to determine appropriate ways to eliminate the hazard or control the risk when the hazard cannot be eliminated.
Risk Register - Identifies key areas of risk in terms of potential frequency and impact, highlights issues that require attention and allocates responsibility. Once the risks have been identified, a simple spreadsheet with a basic scoring mechanism can serve as a risk register.
Business Continuity Planning - Will consider the major risks your company and identify both short and long-term solutions to mitigate the impact. A business continuity plan will be specific to your organisation and identify responsibility with a crisis management hierarchy should an incident occur.
What risk management services can you offer?
We work with a number of risk management partners that are experts within their speciality and can offer a range of services:
> 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 reviews - An independent review of the board, management structure, risk management strategy, 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 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
> Learning reviews - Key learning 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.
Please contact us
to discuss your individual requirements and see how we can support and improve your risk management planning and processes.
This guide is for information purposes and based on sources which we believe are reliable, the general risk management and insurance information is not intended to be taken as advice with respect to any individual circumstance and cannot be relied upon as such.