conclusion of risk management essay

conclusion of risk management essay

The Importance of Effective Risk Management: Key Takeaways and Future Directions

1. Introduction to Risk Management in Various Sectors

Nowhere is this challenge of different perceptions more visible than in the relationship between public and private institutions and their respective risk management frameworks. The question arises then of the extent to which we can develop a more integrated approach to risk management. The relationship between public and private risk management perceptions is the subject of this paper. First, however, we restate what is risk and risk management and discuss framework safety precautions. We end the paper again with some conclusions.

Running an effective organization therefore implies that we must have a good understanding of all the risks that current and future decisions will create and include the implications in these decisions, while mitigating critical risks to create tangible remaining value. Challenging, to say the least! In addition, even though there is usually a significant and growing incidence of severe low-probability events, these are almost always visible to only a few people because others employ a different risk taxonomy or a different and incompatible cost-benefit frame of reference.

A vast array of risks confronts all industries and institutions today. They are frequently interrelated. For example, financial risks can translate to environmental risks and vice versa. The recent financial and banking crisis led to all sorts of additional problems, which laminated financial risks to trade risks and other operations risks including reputational risks.

It is very difficult to accomplish anything reliably or add value when excessive uncertainty gets in the way. Achieving almost any endeavor involves taking risks. The coming financial, environmental, and societal crises will, however, highlight the vital importance of managing these risks effectively. Though the importance of effective risk management is generally stressed, this paper attempts to provide a framework to make things a little more tangible.

2. Key Strategies and Best Practices in Risk Management

2.1 Evaluate the need for risk management tools At present, industry best practices direct managerial considerations, such as the total budget, time frame, or alleged complexity of project activity, inappropriately guide these decisions. We propose that risk management vulnerability, risk impact, and project probability information can provide much better guidance. These parameters are highly relevant to specific project structures and can help project management practitioners avoid potentially under- or overly complex tools.

Some risk management activities, particularly identification and assessment, occur as discrete, project-level steps. Others, such as the monitoring and control of risks, are ongoing throughout the life of a project. Using standalone project-risk management tools, or simply investing in a full-scale enterprise risk management procedure, inappropriately adheres to a one-size-fits-all model that is impractical for many organizations and that overscales the risk assessment process. In this section, we examine the most effective—yet overlooked—project-risk management strategies and practices used by project management practitioners. We focus first on how to best construct the tools used in the process.

3. The Role of Technology in Enhancing Risk Management

Within financial firms, successful risk management is implementations of any and all activities designed to control potential, possible and actual risks stemming from complex systems typically operating in the financial markets for the purpose of generating bank profits and economic capital. Although the goals of risk management differ somewhat by financial firm and type of financial firm—for example, hedge funds operate to generate investment returns while minimizing investor risk, while banks seek to financially underwrite the activities of their trading and commercial banking customers—the basic tools of risk management are fairly similar. Banks exist to conduct financial intermediation—at the most basic level, the business of banks is to perform clearing and settlement between buyers and sellers of goods and services.

In addition to the people, processes, and governance features discussed above, the technological systems and data sets used by financial firms to manage risk are becoming increasingly important to the functioning of their risk management practices. This is a natural product of technological advances including computing speed and storage, an increased ability to manipulate very large data sets (also known as Big Data), and an emphasis on analyzing the extremely complex and non-linear relationships that characterize modern risk profiles. Additionally, banking organizations and other financial firms undergo their own internal digitization process as they frame, measure, and manage their own internal risks. To better understand the importance of technology and data to risk management, it is helpful to start with definitions of key risk management terms and concepts. Then, we examine a variety of ways technology and data are used by financial firms to manage their risk.

4. Challenges and Limitations of Current Risk Management Practices

This section addresses some of the challenges and limitations of current risk management practices. Challenges can be related to compliance management—the processes for managing, filing, and reporting on compliance with insurance, risk, financial, and tax requirements or managing external stakeholders—that require more effective coordination of insurance, risk management, safety, control and financial management practices. Some of the limitations of current risk management practices can be traced back to some issues and challenges we have discussed in this article. For example, excessive risk management practices such as low loss retentions and overly conservative investment strategies can hold back the sustainable growth of innovative businesses and therefore hurt the long-term competitiveness of American companies. One study suggests up to ten ways in which risk managers can optimize future profits and sustainability.

This article has thus far laid out the importance of effective risk management. Risk management has been shown to help firms achieve a number of corporate and financial objectives, including (but certainly not limited to) financial statement reporting credibility, cost and revenue, tax (including tax minimization and tax avoidance), credit rating, and corporate governance objectives. Effective risk management practices also help firms comply with state, federal, and international regulations and support a well-functioning global financial system. This study then discussed and benchmarked a number of risk management tools available to firms today.

5. Future Directions and Innovations in Risk Management

Future directions in risk management may require investment in more foundational work. Since our workshop was focused on retiree health and financial risks, it may entail engaging researchers across a number of disciplines and application areas. What would be the ideal training and research program for a future Chief Risk Officer? I commend many of the ideas and papers of the National Research Council on Risk Management for the Future, edited by Kerry Krutilla and Aaron Gellman. These ideas underscore the importance of academic contributions in risk management. Kate Farrow and I would welcome the opportunity to support such work.

I outlined the importance of good risk management as we transition to the life-course perspective and highlighted the need for a more comprehensive, earlier risk management strategy. Too much risk management is focused on a specific financial or medical product. We all need to be our own Chief Risk Officers. Offering good risk management advice is not a solved problem. For example, we need systems for better understanding and communicating about how different options fit into a coherent life-course risk management plan. These suggestions have focused on the analysis of innovative new features or risk management strategies.