What is Risk Management Process?

Return is not a one way street. Your investment planning decisions always come with a risk reward trade off. It is important to always estimate your risk appetite and look for ways in which one can reduce such risk to gain the maximum benefit from his investment.

In this article we try to decode the steps involving the risk management process. From an investment standpoint it is always helpful to understand how much risk you are bearing and in order to get a basic idea of this it is always helpful to follow the below mentioned points.

 

The steps of the risk management process include:

1. Identification of Risk: Identify the risks that the business is exposed to in its operating environment. There are many different types of risks – legal risks, environmental risks, market risks, regulatory risks, and much more. It is important to identify as many of these risk factors as possible. Not only should risk identification be undertaken as early as possible, but it also should be repeated frequently.
2. Analyze and Prioritize: Risk analysis transforms the estimates or data about specific risks that developed during risk identification into a consistent form that can be used to make decisions around prioritization. Risk prioritization enables operations to commit resources to manage the most important risks.
3. Plan and Schedule: Risk planning takes the information obtained from risk analysis and uses it to formulate strategies, plans, change requests, and actions. Risk scheduling ensures that these plans are approved and then incorporated into the standard day-to-day processes and infrastructure.
4. Track and Report: Risk tracking monitors the status of specific risks and the progress in their respective action plans. Risk tracking also includes monitoring the probability, impact, exposure, and other measures of risk for changes that could alter priority or risk plans and ultimately the availability of the service. Risk reporting ensures that the operations staff, service manager, and other stakeholders are aware of the status of top risks and the plans to manage them.
5. Control & Learn: Risk control is the process of executing risk action plans and their associated status reporting. Risk control also includes initiating change control requests when changes in risk status or risk plans could affect the availability of the service or service level agreement (SLA). Risk learning formalizes the lessons learned and uses tools to capture, categorize, and index that knowledge in a reusable form that can be shared with other

The following measures have proved to be helpful in managing risk over the years:

• Investment Planning
• Insurance
• Retirement Solutions
• Tax and Estate Planning

 

Investment planning

Investment planning is an essential part of the financial planning process. Without a proper investment plan, the client is unlikely to reach the set target in funding his/her retirement and educational needs. In investment planning, some of the important factors that need to be considered are as follows:

 

• What is the person’s risk profile – How averse is he to investment risk? This will help determine proper asset allocation and selection of investment vehicles. A more conservative investor should opt for an asset allocation that takes into account his aversion to high investment risk taking.
• What is his time horizon – How much time does the person have to achieve his financial objectives? If the time horizon is long, investments having a higher risk and potential returns may be resorted to or may be to produce a better yield.
• What are the person’s financial objectives? To accomplish anything, it is necessary to set targets.

 

This is especially so in the realm of investments. Investment products are available for individual and institutional investors, and are purchased in an attempt to generate a profit. Some investment products, such as certain types of bonds, provide a fixed interest payment in addition to a return of the initial investment at the time of maturity. Other types of investment products, such as stocks, which have greater risk and on the other hand earnings are not guaranteed.

The difference between savings and investment is that savings is simply idle cash while investments help your funds to grow over a period of time. Savings can fulfil our short term need but to meet our long term goals we need to make investments. Savings help to protect our principal while investments help us earn returns over our investments.

 

Insurance

Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of an uncertain loss. An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and must involve something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

The insurer receives a contract, called the insurance policy, which provide details related to the conditions and circumstances under which the insured will be financially compensated. The premium is the amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.

Methods of Insurance

In accordance with study books of The Chartered Insurance Institute, there are the following types of insurance:

 

• Co-insurance risks shared between insurers
• Dual insurance risks having two or more policies with same coverage
• Self-insurance situations where risk is not transferred to insurance companies and solely retained by the entities or individuals themselves
• Reinsurance situations when Insurer passes some part of or all risks to another Insurer called Reinsurer

To understand more about the insurance sector and how one can insurance his asset base, you can also check out the link Insurance- Meaning, Types & Development

Tax and Estate Planning

While tax evasion is illegal and punishable under the law, it’s lawful to minimize one’s tax obligations if done legally. The financial planner will normally work in hand with a tax adviser. They help the client derive and implement a tax plan that will minimize the tax outlay of the client.

In estate planning, the financial planner helps the client to develop and implement an estate plan that will enhance and preserve the client’s assets during his lifetime, minimize his estate duty liabilities upon his death and ensure that the estate is managed and distributed to beneficiaries in accordance with the client’s wishes. Such recommendations may involve the drawing of wills and trust instruments. Nominated executors and guardians will have to be thoroughly briefed and conveyances may have to be effected to achieve the desired objectives.

Estate planning is even farther into the future than retirement but is something you should be aware of. Estate planning is the process of determining how your wealth will be allocated on or before your death. In other words, what happens to your assets when you die? Do you want them to go to the state, to a particular charity, or to your children and grandchildren? If you resolve these questions prior to your death, you are more likely to have your wishes honored. It will also make it easier on your loved ones.

 

Retirement Planning

India and other countries too currently face a problem of an aging population. The future increase in the elderly population will pose questions such as:

• How will their medical needs be taken care of?
• In what way can they remain useful and productive?
• How will their financial needs be met?

One of the government’s answers to these questions is to increase public awareness. In terms of financial planning and to encourage people to obtain proper financial planning advice. This is so that their retirement needs will be taken care of during their golden years.

The financial planner assists their clients by deriving and implementing a suitable retirement plan to realize their retirement objectives. He helps the clients calculate their retirement funding needs and comes up with a savings and investment plan for them.

The above discussed forms are simple. They provide a basic understanding of the things that one should always keep track of. It is seen that sometimes the simplest of things are the most profound. Experience will teach you more but it is seen that in time of difficulties, little things also make big days.