What is Risk Management?

Risk Management Definition

The implementation of strategies to prevent or minimize potential losses. Well-run businesses employ risk management to limit their exposure to lawsuits, property damage, product recalls, reputational harm, worker accidents and other sources of possible loss.

An effective risk management plan will identify the problems a company might face, how the company can prevent those problems, how it can minimize the impact of any problems that do occur, and how the company will recover financially and reputation-wise.

This planning helps the company save time, income and other assets by minimizing losses. It also protects the company against damage to its reputation or stock price that might occur after an adverse event. Risk management might entail purchasing investments to hedge exposures to certain events or asset classes; analyzing manufacturing plants to look for processes that might injure workers or pollute the environment; or hiring a public relations firm to help the company present its best self to the public.

Example

Mrs. Hobensworthy works as a risk management analyst for a pharmaceutical company. While the company carries plenty of insurance to protect its assets, she doesn’t want the company to ever need to file a claim. The best way for her employer to protect its assets is to prevent and avoid situations that could cause an adverse event. She implements a confidentiality policy to deter employees from sharing company trade secrets that competitors could use; examines drug manufacturing processes for any shortcomings that might lead to a product recall or consumer lawsuits; ensures that the company complies with government regulations; and develops programs to help the company donate to the community to bolster its image.

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Tips From First Foundation

While insurance provides businesses with remuneration for many losses, companies will be better off if they never have to file a claim. Business Insurance doesn’t cover all potential losses (such as loss of reputation or environmental harm); insurance only limits certain financial risks. Filing a claim means meeting a deductible, likely paying higher premiums in the future, and having to recover from the loss. Risk management aims to prevent losses from occurring in the first place. It can also help the company get better rates on its insurance premiums because they pose less risk to insurers.

Individuals who want to help companies manage risk for a living may work as risk management analysts, risk managers or underwriters, and might obtain the Canadian Risk Management professional designation.

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Last updated Oct 29, 2018