Risk Management: What is it and How to Do it Right

There are many reasons why financial institutions decide to adopt risk management practices. One pre-loss objective of such practices is to maximize an organization`s risk-adjusted rate of return on capital. Risk management assists financial entities to avoid excessive exposure to risks. Also, it becomes possible for a company to manage risk relative to the returns they are capable of getting. For example, a business can seek to take up an insurance policy on their property to mitigate the occurrence of a risk such as fire that would destroy their property. As a result, it becomes possible for the financial institution to put less emphasis on the risk and focus on investments expected to generate high returns. Another pre-loss objective is that the practices contribute to the strength and efficiency of a business. The reason behind this is that a mechanism is designed to apportion resources needed to cushion financial institutions, especially those that are involved in high risk ventures. For example, a business can take up a risky endeavor without any fear of loss. Likewise, a noteworthy pre-loss objective is that the practices also enable financial institutions to measure and also manage risks. For instance, it is possible to evaluate the necessity of engaging in a risky venture. 

Post-loss objectives relate to aspects of a risk after exposure. One note-worthy post-loss objective is to minimize the incidence of loss. For example, if a financial institution takes up insurance and the event of risk occurs, the compensation offered diminishes the impact of the damage experienced. Another post-loss objective is on the survival of a business. Some occurrences of loss are usually quite great to an extent of destroying a business entirely. Through risk management, however, such eventualities end up being avoided. Risk management further ascertains stability of earnings. A business will continue generating returns even after an event of loss occurs if risk management measures have been involved. Continued growth is another post-loss objective of risk management. A business is able to expand despite the occurrence of a hazard, since the precautionary measures taken are able to alleviate the occurrence of a loss. Finally, risk management is necessary for any business that wishes to continue generating consistent returns despite any eventuality.