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Risk Management

Risk Management

Author: James Howard

This lesson give an overview of risk management.

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Video Transcription

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Hello. And welcome to this tutorial on risk management. Now, as always with these tutorials, please make sure that you're fast forwarding, pausing, or rewinding as many times as you need in order to get the most out of the time that you're going to spend here. So let me ask you, what's the riskiest thing that you've ever done? Was it jump out of an airplane? Or maybe taunt a neighbor's dog, or maybe the neighbor's cat? When you did this risky thing, did you do things that maybe helped lessen the risk a little bit or mitigate it in some way?

Well, during this tutorial, what we're going to be talking about is risk management. We're also going to be looking at the five steps that companies use to manage that risk. The key terms we're going to be talking about are risk management and speculative risk as well as pure risk.

So let's go ahead and get started by defining what we mean by risk management. Now risk management is classifying and evaluating potential hazards for an organization and developing a systematic response, or non-response, to avert or lower the damage. Now, risk management is something that both large and small companies have to consider. You can't go into risk without taking a look at it and having some type of risk management plan in place.

Now, there are basically two types of risk. And the first one we're going to look is something called speculative risk. And this is a type of risk that can create a loss or gain in the situation. And here, we're not always sure what the magnitude of that loss or gain will be. For instance, designing a new product, or maybe investing in a stock. There's risk involved with that, and it could go either way. We can have a gain or a loss, but we're not always going to be sure on what that magnitude, or what that amount of gain or loss, is going to be.

And the second type of risk is something called pure risk. Now, pure risk is a type of risk that creates only a loss, or no loss situation. So you either survive and do well, or you have a complete loss. Think of a house getting hit by a hurricane or destroying a building. And this is risk that is really way beyond the risk taker's control. It's something that exists outside of their ability to speculate on it or to control it in some way.

Now, five steps to risk management are, one, we want to make sure we're identifying those risks that we're taking and also what the potential losses might be along the way. We want to measure the frequency and severity of those losses and then consider the choices that we have.

How severe the loss is going to be? How will they impact what I already have? And what are the choices that we can make, as an organization, to deal with these types of risks? Well, there's basically four different choices that we can use. The first one is called risk avoidance, or where we're avoiding, or stopping, risky practices altogether.

The next is risk control, where we're attempting to minimize the frequency of those risk practices. We're not going to take as many risks going down the road that maybe we did beforehand. And we want to make sure that we look at risk retention, also. When risks cannot be avoided, we want to make sure that the cost of those risks are assumed. For instance, people not paying their credit card, or not paying that credit card on time, that we look at that risk and making sure we're accounting for it.

Now, one last one we want to talk about is called risk transfer. And this is where we're transferring large risks to another firm. For instance, having insurance would be transferring that risk to someone else. If I suffer a loss, then the insurance company is going to be the one that pays for that loss.

Now we've made it up to Number 3 on those five steps in risk management. So let's go ahead and take a look at Number 4. We're implementing a risk management program. After we've identified those risks, measured how severe they are and considered the choices that we can take as an organization to deal with them. Now, we want to make sure we have a good, solid risk management plan in place. And this is an organization's plan to mitigate and deal with potential risk, both internal to the organizations and things that happen outside the organization that I may or may not have control over.

And lastly, I want to monitor my risk management plan and evaluated it, make sure that it's doing the things that I want it and need it to do. And this is absolutely essential to make sure that new risks are being considered and that the organization is reassessing the risks that we already know and understand accordingly in that light of the new risks.

So what is it we talked about today? Well, we looked at risk management and what it is, and how it's absolutely critical for companies large and small. And we looked at those five different steps in risk management-- identifying, measuring how often they occur and how awful they could be, considering those choices that we can make, like risk avoidance, risk control, risk retention, risk transfer, and implementing a risk management plan and finally monitoring it to make sure that it's doing the thing we need it to do.

Now as always, I want to thank you for spending some time with me today. And you folks have a great day.

Terms to Know
Pure Risks

A type of risk that creates only a loss or no loss situation.

Risk management

Classifying and evaluating potential hazards for an organization and developing a systematic response (or non-response) to avert or lower the damage.

Speculative Risk

A type of risk that can create a loss or gain in the situation.