Risk management is the strategic process of evaluating, responding to and minimizing the risks associated with business activities and systems. Risk management information systems are software programs that help managers and directors oversee risk management tasks and processes.
What is Risk Management?
Risk management is the process that allows executives to balance operational needs with the financial costs of labor, protective programs and control measures. Its ultimate goal is to protect the systems that support the organizations’ mission and operations. Risk management is often associated with financial activities, such as credit and investment decisions, and chancy business actions, such as mergers and acquisitions. However, every business function can benefit from proper risk management evaluations. Because highly functioning business processes are so important to the success of any company, business owners must weigh the overhead costs against the value of downtime and poor functionality. Failure to evaluate and mitigate risks may result in catastrophic consequences for businesses.
What Does it Entail?
Risk management involves three processes: risk assessment, mitigation and evaluation. The risk assessment process includes the identification risks, the evaluation of risk impacts and the actionable recommendation for risk control measures. If a new customer relationship management system is needed, an assessment will highlight the risks of both upgrading and failing to update the system. Risk mitigation refers to activities that prioritize, implement and maintain appropriate risk-reducing systems and measures. For example, supply chain managers will use risk management information systems to forecast potential logistical problems. The final continual evaluation process refers to tools that monitor and report on performance. Information gleaned from projects result in specific caveats and opportunities that can be applied to future business projects.
How to Rank Risks
JDi Data said, “Risks involve complex factors that include people, processes, tools, customers, expectations and finances.” There are traditional risk matrixes to manually calculate risks, but risk management information systems streamline the research process. Risk matrixes are primarily used to determine the potential severity of a risk and whether or not it can be sufficiently controlled. It’s important to understand that a risk matrix by itself is not a standalone decision making tool. Instead, it is best suited for creating constructive dialogues between managers that uncover hidden problems and highlight potential alternative solutions. Risk matrixes are made up of at least two numbered rating scales, which are usually probability and severity, with qualitative descriptions on the axes. The resulting qualitative score cannot be used to make any sophisticated calculations, but will provide a general consensus of the associated risks.
First, there are many ways to look at severity, but the four perspectives of PEAR are typically used. PEAR stands for People, Environment, Assets and Reputation. Any business activity or event can be judged against these four categories, but it is sometimes difficult to compare two events with each other. Because aggregating risk matrix scores is difficult, the best way is to make a qualitative score for a sound judgement. When it comes to probability, a simple scale of frequency is preferred over detailed statistical formulas. Risk management information systems are very helpful because they draw on historical data that increases the accuracy of probability and frequency predictions. Events that are low probability and high severity, and vice versa, should be treated with equal care.
Almost all major insurance carriers and agents offer at least one risk management service to their clients and brokers. These risk management information systems allow end users to research claims, trending reports, policy summaries and payment history. This information is then used by insurance analysts for cost allocation, fraud prevention and claim management purposes. For example, insurance companies will increase their policy prices based on how demographic groups files claims. Insurance brokers use software programs that access their potential client’s claim data through carrier systems. In order to obtain the best insurance policy quote, consumers should carefully review how insurance companies analyze and rank demographic risks.
Risk management information systems are valuable tools to help business personnel protect assets and make sound business decisions.