Risk Management and Insurance Essay Example

After taking this course, I have learned a better way of defining risk. Risk can be defined as a probability which an event has to occur and also the consequences which can result from the occurrence of the event. I also have a clear understanding of the risk management concept; this is the practice of creating and making use of processes, tools, and methods to manage any risks which have been found. Risk management has a primary focus on the identification of things that could go wrong, analyzing the risks which are available and implementing the strategies which will be used to deal with the risks identified. There is a need for business firms to identify the risks which are involved in the running of the business so that they can be able to prepare and put in place cost-effective strategies to deal with the risks. Before undertaking this course, I had a different understanding of risk (Bromiley et al., 2015). I understood that risk was defined as the increased probability of losing something that has a high value. In this case, things of value include; financial wealth, physical health, emotional wellbeing and in some cases losing the social status. For instance, I believed that an individual engaging in an extreme sport and breaking his or her leg or arm is risky. The perceptions that I had about risks were subjectively based on the judgment about the severity of the activities that individuals got themselves involved in. The threats were more about human endeavors; I perceived some aspects of human life to be riskier than others.

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A risk profile is defined as an analysis or evaluation of a business or an individual's ability and willingness to take risks. Risk profile can also be used to refer to the threats that an individual or a particular organization has which can expose them to the potential dangers. It is essential to have a risk profile as it will help in the determination of the proper asset allocation for investment to be made, the risk profile for business firms is also essential as it will assist the organizations in mitigating the potential threats and risks which are involved in the business (Reim, Parida & Sjodin, 2016). The risk profile will help in the identification of the acceptable levels of risks which an individual can be able to accept or the risks which one is prepared to take. For a business corporation, the risk profile tries to determine the ability and the willingness that the firm has in taking risks or avoiding the dangers and the way this will impact the strategy making or the decision-making process. The individual risk profile determines the willingness and preparedness of an individual to take a risk or to avoid a particular threat. The risk profile of an individual affects the individual in taking risks and also the society by identifying the risks which affect the community by influencing the contributions that an individual can make on society. The business risk profile also affects society and individuals in different ways. By understanding the risk profile, an organization can be able to minimize its potential risks which can lead to risks. In case the organization does not create a risk profile, this can lead to an adverse outcome which will adversely affect society. For instance, if a drug firm does not conduct proper tests on a new treatment which they are about to roll out and use the required channels, the drug may harm its users which will lead to the company facing legal and financial issues.

To mitigate and manage risks, a business needs to follow some particular steps which include; identify the risks which the company faces. The company needs to determine the dangers which might affect its operations and prepare a risk profile for the organization. The company also needs to analyze the risks which have been identified. This way, it will be possible to determine the consequences and probability of the risks. The potential impacts of the company can also be identified too through this analysis. There is also a need to evaluate the risks; this way the risks will be ranked and the magnitude of the risks identified. The probable effects of the combined or a particular risk can be determined so that a proper way of handling the risks can be found. The organization then needs to find appropriate methods of treating the risk; this can also be referred to as developing a risk response plan. In this step, the company will be able to develop strategies to handle the potential risks which might affect the company. To efficiently manage the risk, the company needs to monitor the risk and review its impacts. In this step, the company will be able to track the risks involved in the business and examine their effects so that they can be able to develop proper strategies to handle the issues.

There are monetary and non-monetary costs which are involved in risk mitigation. The financial costs involved in the risk mitigation include; costs of hiring experts who will be involved in identifying the risks and also treating the potential risks which might affect the business (Smith, 2016). The non-monetary costs, in this case, include the resources which are required in the process of identifying the potential risks in the business. These resources which cause non-monetary costs include; the time used in determining the potential risks of the company.

Conclusion

In mitigating risks, insurance can be used to help business firms and individuals cover the effects of the risks. In developing strategies to minimize the risks, it is essential to include insurance so that the potential impacts of the risks can be efficiently managed. Some of the decisions which are made by the insurance companies that make it necessary to use the insurance firms to mitigate risks include; the operations of insurance companies are regulated by the laws and policies which have been set, this means that the company is not getting involved in other risks (Smith, 2016). The insurance companies have experts who can identify the potential effects of the risks and also the threats which can cause risks (Grace et al., 2015). The insurance organizations are also able to efficiently prepare a management plan which can be used to manage the risks which have been identified. The insurance companies take the liability of the adverse impacts that the potential risks of the organization can cause the organization. Unlike the strategies which are developed by the business firm to manage the implications of the risks where the company can incur liabilities, using the insurance to mitigate the effects of the risks will transfer the commitments to the insurance companies.

References

Bromiley, P., McShane, M., Nair, A., & Rustambekov, E. (2015). Enterprise risk management: Review, critique, and research directions. Long range planning, 48(4), 265-276.

Grace, M. F., Leverty, J. T., Phillips, R. D., & Shimpi, P. (2015). The value of investing in enterprise risk management. Journal of Risk and Insurance, 82(2), 289-316.

Reim, W., Parida, V., & Sjodin, D. R. (2016). Risk management for product-service system operation. International Journal of Operations & Production Management, 36(6), 665-686.

Smith, V. H. (2016). Producer insurance and risk management options for smallholder farmers. The World Bank Research Observer, 31(2), 271-289.