Risk Management
Risk management is the systematic process of identifying, evaluating and controlling potential threats to the business
Risk Management Planning
What is risk management?
Risk management is the systematic process of identifying, evaluating and controlling potential threats to the business. No business can be successful without taking risks, the question is how much exposure can you accept in order to achieve your strategic objectives? Developing a business risk management plan involves understanding the potential threats, evaluating their potential consequences, and developing effective risk management strategies to mitigate or transfer them.
Does our business need a risk management plan?
How does a risk management process work?
A risk management process can ensure you achieve your objectives without taking unnecessary risks. The process of developing a risk management process will assist your business understand it's appetite for risk. Communicating that message to your staff will set the tone and form an important part of your company culture.
1. Risk identification
2. Analyse and measure
3. Risk assessment
4. Mitigate or transfer risk
5. Contingency planning
6. Monitor and review
How to identify business risks?
There are a number of different types of risks should be considered:
Strategic risks
Strategic risk is related to decisions that affect a company’s ability to achieve its long-term goals. These threats often arise from the current strategic objectives, and external market forces, such as technological advancements, or economic trends. All of which can disrupt the long-term plans to achieve the company's goals.
Operational risks
Operational risk arises from the day-to-day activities and are often linked to internal processes, systems, and people. For example, supply chain disruptions, equipment failures, and workforce challenges. Health and safety can be a significant operational risk to the business, given that businesses have a duty of care to provide a safe working environment.
Financial risks
Financial risk relates to the business being able to manage its financial resorces to meet it's ongoing financial obligations, with hindering opportunities for growth. Common financial risks include credit risks, liquidity risks, investment risks, and market volatility. It could can also include your financial controls to guard against losses, such as social engineering fraud.
Compliance risks
Compliance risk arises from failing to adhere to laws, regulations, and industry standards. These legal risks can lead to compensation claims, financial losses, regulatory fines, and reputational damage. For example, failing to secure personally identifable information under GDPR - the primary data protection legislation currently in force in the UK.
Reputational Risks
Reputational risk can threaten a company's public image and stakeholder trust. These can arise from negative publicity, ethical failures, and customer dissatisfaction. Trust in your business is paramount and could impact your ability to secure new customers and retain existing customers. Maintaining quality standards and responding quickly should mitigate potential threats.
Importantance of risk appetite
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. Risk appetite acts as a benchmark for evaluating opportunities and threats. By understanding how much risk the business is willing to accept, decision-makers can assess potential actions more effectively. When risk appetite is clearly understood and communicated, it becomes a powerful tool not only for managing risk but improving performance.
How to evaluate business risk?
The Health and Safety Executive offers a useful guide to your obligations required under UK law, including undertaking a risk assessment. There are various guides about different industry sectors which carry a higher degree of health and safety risk.
It's important for UK businesses to understand that some injuries, diseases and dangerous occurrences must be reported. To understand your obligations please read the government website: https://www.hse.gov.uk/riddor
Risk matrix
SWOT analysis
Quantitative risk assessment
Scenario analysis
Additionally, there are numerous industry specific software platforms available that can assist with risk assessment and monitoring. These can centralise data for better decision making and provide management dashboards and reports.
Business insurance in risk management
When risks that have the potential to cause significant financial impact but the chance of occurring is low, they're best transferred from your balance sheet with business insurance. With adequate protection, companies would be required to maintain increased capital reserves to protect against unforeseen events. The pooling of premium therefore provides an effective risk management tool to spread the cost and reduce the financial impact.
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. During the application process, whether with this is either a proposal form or statement of fact, insurers will often require businesses to maintain minimum controls and risk mitigation measures before providing cover. This promotes best practices and reduces the likelihood of incidents. For example, cyber insurers will commonly require minimum cybersecurity controls.
Once the different types of risk have been identified and understood, businesses should evaluate available what insurance products are available to meet their needs. There are a number of standardised insurance products available which are commonly purchased to mitigate the impact of financial losses and provide timely access to a legal defence. It's worth speaking to an insurance broker, so they can advise what covers are typically purchased by your peers and the potential costs.
What business risks should we focus on?
Safety risks
It's important to 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 service providers protection against legal costs incurred in defending allegations and will pay any damages awarded.
Regulatory risks
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.
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 consider cybersecurity, cyber insurance and contingency planning. Cyber cover can now provide 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
It's important to protect 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 may be 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.
Enterprise risk management
Implementing an enterprise risk management framework and leveraging project risk management software are vital steps in modern risk management. Frameworks like COSO, ISO 31000, and the Three Lines Model provide structured approaches to managing enterprise-wide risks, while project risk management software enhances efficiency and collaboration at the project level.
Together, these tools enable businesses to identify, assess, and mitigate risks proactively, fostering resilience, operational efficiency, and financial stability. By integrating risk management into strategic planning and leveraging technology, businesses can navigate uncertainties confidently and achieve their objectives.
Business continuity planning
Business continuity planning is a critical component of business resilience, providing strategies to maintain operations during a crisis. Major disruptions such as natural disasters, cyberattacks, pandemics, and supply chain interruptions, for example, can severely impact business operations. Business continuity planning seeks to mitigate these risks by creating a step-by-step plan on to how best to minimise downtime, protect revenue streams, safeguard your reputation, and ensure any regulatory compliance.
Taking a pro-active stance allows for these decisions to be made in advance of the crisis occuring. Preventative measures, response strategies, and recovery initiatives can be considered at length to minimise the impact. Effective communication during a crisis ensures that stakeholders are informed and coordinated. Whilst business interuption insurance can provide welcome relief to protect against financial losses should you be unable to trade.
Importance of a comprehensive risk management approach
A comprehensive risk management approach is essential for businesses to navigate an increasingly complex and volatile environment. By addressing potential risks proactively, businesses can minimise disruptions and maintain operational continuity during crises, safeguarding revenue and reputation. A structured risk management framework provides actionable insights, enabling leaders to make data-driven decisions and allocate resources efficiently. Whilst effective risk management ensures adherence to legal and regulatory requirements, reducing the likelihood of fines, legal action, or reputational damage.
Businesses must stay ahead of emerging trends to address evolving risks effectively. Key trends include increased cyber threats, AI, climate related risks, supply chains, regulatory complexity, hybrid work related risks, regulatory fines, and increased litigation.
Written by Simon Taylor
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.