Risk Management

Risk Management

Risk is a concept in project management but also in financial activities. We will consider risk as a financial topic. Therefore, the degree and magnitude of the risk can be influenced through a financial mechanism. Such an impact is realized through the methods of financial management and especially strategies. Together, the strategies and techniques form a kind of risk management mechanism, ie. risk management. Thus, risk management is part of financial management.

At the heart of risk management is the purposeful research and organization of work to reduce the degree of risk, the art of obtaining and increasing income in an uncertain economic situation.

The ultimate goal of risk management corresponds to the target function of entrepreneurship. It consists in obtaining the greatest profit at optimal, acceptable to the entrepreneur ratio between profit and risk.

Risk management is a system for managing risk and economic, more precisely financial relations, arising in the process of such management. Reference: "Project risk management", (BVOP) Project risk management

Risk management includes management strategy and tactics.

Management strategy means the direction and manner of using the means to achieve the set goal in an uncertain situation. Each method corresponds to a set of rules and restrictions for decision-making. The strategy allows concentrating efforts on alternative solutions that do not contradict the adopted strategy, rejecting all others that do not meet the set conditions. After reaching the set goal, the strategy as a direction and means for its achievement ceases to exist. The new goals become a task for the development of new strategies and options for their implementation.
Tactics - these are the specific methods and techniques for achieving the goal (s) in specific conditions. The task of management tactics is to choose the optimal solution and the most acceptable methods and techniques of management in a changing economic situation.
Risk management as a management system consists of two subsystems: a managed subsystem (object of management) and a management subsystem (subject of management).

The subject of management in risk management - this is a special group of people (financial manager, insurance specialist: acquirer, actuary, underwriters, etc.), who through various methods and ways of management impact carry out the purposeful operation of the object of management in an uncertain environment. Reference: "Risk management practices in project management", Risk management practices in project management

The process of influence of the subject on the object of management, ie. the process itself can take place only under the conditions of circulation of certain information between the control and the managed subsystem. The process of management, regardless of its specific content, always involves receiving, transmitting, processing, and using information. In risk management, the received reliable and sufficient information under certain conditions plays an important role, as it allows to make specific decisions for action in the conditions of risk.

The information support of the functioning of the risk management consists of different kinds and types of information: statistical, economic, economic, financial, etc.
This information includes awareness of the probability of one or another insured event, insurance events, the availability and size of goods and services, capital, financial stability and solvency of its customers, rates, and tariffs for the services of the insurer, insurance conditions, dividends, and percentages, etc. Reference: "The Qualitative Approach to Project risk assessment", The Qualitative Approach to Project risk assessment

He who owns the information owns the market. Many types of information are often subject to trade secrets. The supply of various types of information is intellectual property (know-how) and its payment to represent a share of the authorized capital of the joint-stock company.
A manager who has a high enough qualification always tries to get any information, even the worst, representing key moments from it. Even refusing to talk about a topic (silence is also a language of communication) is information that the manager can use to his advantage. The information is collected in "crumbs". These crumbs have the same information value.
The availability of reliable information in the financial manager allows him to quickly make financial and commercial decisions, influence the correctness of these decisions, reduce losses and increase profits. The full use of information in concluding transactions is reduced to a minimum probability of financial loss.

Every decision is based on information. The quality of the information is important. The vaguer it is, the vaguer it is, the vaguer the decision. The quality of information should be assessed when it is received, not when it is given. Information becomes obsolete quickly, so it must be used operationally.
The economic operator must be able not only to collect information but to store it and search for it when necessary.
Currently, the best file for collecting information is the computer, which allows you to quickly find the necessary information by coding. The computer executes decisions but does not update them.

Functions of risk management

Risk management performs:

  • functions of the object of management;
  • Functions of the subject of management.

The functions of the object of management in risk management include the organization of:

  • risk resolution;
  • risky capital investment;
  • the work on reducing the magnitude of the risk;
  • the risk insurance process;
  • economic relations and the relations between the subjects of the economic process.

The functions of the subject of management in risk management include:

  • forecasting;
  • organization;
  • regulation;
  • stimulation;
  • control.

Forecasting in risk management

The forecasting in the risk management is a development for the perspective change of the financial condition of the whole site and its different parts. Forecasting - this is the prediction of a particular event. It does not set the task of directly existing in the practice of the developed forecasts. The peculiarity of forecasting is the alternative in determining the financial indicators and parameters defining the different options for economic development, incl. of the financial condition of the object of management based on identified trends. Risk is projected in dynamics, using extrapolation of the past into the future, taking into account expert assessments of changes in trends, and directly predicting changes. These changes may occur unexpectedly. Management based on predicting these changes requires the development of certain intuitions in the manager about the actions of the market mechanism and the implementation of flexible extreme solutions.
The organization in risk management is an association of people who jointly implement a program for risk capital investment based on certain rules and procedures. These rules and procedures include the establishment of management bodies, building the structure of the management apparatus, establishing the relationship between management units, development of norms, standards, methodologies, etc. Reference: "Risk Management in Project Management practices", Risk Management in Project Management practices
Regulation in risk management is an impact on the object of management, through which the stability of the object is achieved in cases where deviations from the set parameters occur. The regulation covers, above all, current activities in identifying emerging deviations.
Coordination in risk management is the coherence between the work of all units of the risk management system (the company), its management staff, and the individual employee.
Coordination ensures the unity of the relations between the object of management, the subject of management, the apparatus of management, and the individual worker.

Stimulation in risk management

Stimulation in risk management is an incentive for financial managers, other professionals, and those interested in the results of their work.
The control in risk management is an inspection of the organization to reduce the risk. the program, the organization of financial work, and risk management.
The control presupposes an analysis of the result of the measures for reducing the degree of risk.
As a form of entrepreneurial activity, risk management means that risk management is a creative activity carried out by financial managers.
Therefore, risk management can become an independent type of professional activity. This type of activity is performed by professional institutes of specialists, insurance companies, as well as financial managers, risk managers, insurance specialists, and others.

The sphere of entrepreneurial activities of risk management in the insurance market. It is the sphere of manifestation of economic relations in connection with insurance. The insurance market is an area of ​​monetary relations, where from the objects "buy-sell" arise insurance services provided to citizens and business entities of insurance.
Organization of risk management. The economic content of risk management is a system of risk management and financial relations arising in the process of this decision.
As a management system, risk management includes:

  • the process of developing risk objectives and risk capital investment,
  • determining the probability of occurrence of events,
  • disclosure of the degree and magnitude of the risk,
  • analysis of the surrounding environment,
  • choice of risk management strategy,
  • selection of the risk management techniques needed for a strategy and ways to reduce it,
  • implementation of targeted impact on risk.

The organization of risk management

The organization in a broad sense is a set of processes or actions leading to the formation and improvement of the relationship between the parts of the whole.

The organization of risk management is a system of measures aimed at the rational combination of all its elements in a single technological process for risk management.

The first stage of the organization of risk management is to determine the purpose of the risk and the objectives of the risk investment of the capital. The purpose of risk - this is the result that needs to be obtained. It can be profit, income, etc. The purpose of risky capital investment is to obtain maximum profit.

Any action related to risk is always purposeful because the absence of purpose makes the decision related to risk meaningless. The purpose of risk and risk capital investment must be accurate, specific, and comparable to risk and capital.
The next important stage in the organization of risk management is to obtain information about the environment that is needed to make decisions in favor of one or another action. Based on the analysis of this information and taking into account the risk objectives, the probability of occurrence of the event can be correctly determined, incl. of the insured event, to determine the degree of risk, to assess its value.

Risk management means a correct understanding of the degree of risk that constantly threatens people, property, the financial result of economic activity.
The entrepreneur needs to know the true value of the risk to which his activity is exposed.

Risk value should be understood as the actual losses of the entrepreneur, the costs of reducing the magnitude of losses, or the costs of reducing these losses by replacing them and their consequences. The correct assessment by the financial management of the actual value of the risk allows him to objectively present the volumes of possible losses and to identify ways to prevent or reduce them, and in case of impossibility to prevent the loss to ensure its replacement.

Based on the available information about the environment, the probability, degree, and magnitude of risk, different options for risky capital investment are developed and their optimality is assessed by comparing the expected results (profit) and the magnitude of the risk.
This allows you to choose the right strategy and methods of risk management, as well as ways to reduce the degree of risk.
At this stage of the organization of risk management, the main role is played by the financial manager, dealing with risk issues and the choice of the optimal option. He is obliged to have two rights: 1) to choose a variant of a decision and 2) to be responsible for its implementation and for obtaining the results provided by it.

The right to choose means the right to make the decision necessary to achieve the set goal of risky capital investment. The decision is to be taken individually by the manager. Due to the specifics of risk management, due to the special responsibility of the decision-maker in the conditions of risk, it is inadmissible for the decision to be collective (group). Nobody is responsible for him. A decision-making team is never responsible for its implementation. It should also be borne in mind that the collective decision due to the psychological nature of individuals (their antagonism, selfishness, political or ideological platform, etc.) is more subjective than the decision taken by a specialist.

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