We will be considering the objectives of risk management; what are the goals we want to actualize with risk management.
Before we get to the objectives of risk management, let’s refresh our memory on what risk management is:
What is risk management
Risk management is a technique used to control and avoid threats to life, property, environment and business as a whole. Risk management is a practice which is required and followed by every business irrelevant of their size and nature. It aims at recognizing the potential threats in advance and all necessary steps taken to avoid their adverse effects on business operations.
Risk management should be a continuous and forward-looking process. Itis a process that requires strong leadership across all stakeholders. The best risk management programs are proactive rather than reactive. Risks can endanger an organization’s progress toward achieving critical objectives. Having a risk management plan is easier and more cost-effective than to address a sudden crisis or situation that’s gotten out of control.
Risk management is not only peculiar to HSE (Health and Safety), it is equally peculiar to the financial sector; but the optimum goal is business sustainability and profiting. To achieve this goal all round risk management is very important.
Objectives of Risk Management
The objectives of risk management can be broadly classified into two:
- Pre-loss Objectives
- Post-loss Objectives
An organization has many risk management objectives prior to the occurrence of a loss. The most important of such objectives are as follows;
- The first objective is that the firm should prepare for potential losses in the most economical way possible. This involves as analysis of safety program, insurance premiums and the costs associated with the different techniques of handling losses.
- The second objective is the reduction of anxiety. In a firm, certain loss exposures can cause greater worry and fear for the risk manager, key executives and unexpected stockholders of that firm. For example, a threat of a lawsuit from a defective product can cause greater anxiety than a possible small loss from a minor fire. However, the risk manager wants to minimize the anxiety and fear associated with such loss exposures.
- The third pre-loss objective is to meet any externally imposed obligations. This means that the firm must meet certain obligations imposed on it by the outsiders. For example, government regulations may require a firm to install safety devices to protect workers from harm. Similarly, a firm’s creditors may require that property pledged as collateral for a loan must be insured. Thus, the risk manager is expected to see that these externally imposed obligations are met properly.
Post-loss objectives are those which operate after the occurrence of a loss. They are as follows:
- The first post-loss objective is survival of the firm. It means that after a loss occurs, the firm can at least resume partial operation within some reasonable time period.
- The second post-loss objective is to continue operating. For some firms, the ability to operate after a severe loss is an extremely important objective. Especially, for public utility firms such as banks, dairies, etc, they must continue to provide service. Otherwise, they may lose their customers to competitors.
- Stability of earnings is the third post-loss objective. The firm wants to maintain its earnings per share after a loss occurs. This objective is closely related to the objective of continued operations. Because, earnings per share can be maintained only if the firm continues to operate. However, there may be substantial costs involved in achieving this goal, and perfect stability of earnings may not be attained.
- Another important post-loss objective is continued growth of the firm. A firm may grow by developing new products and markets or by acquiring or merging with other companies. Here, the risk manager must consider the impact that a loss will have on the firm’s ability to grow.
- The fifth and the final post-loss objective is the social responsibility to minimize the impact that a loss has on other persons and on society. A severe loss can adversely affect the employees, customers, suppliers, creditors and the community in general. Thus, the risk manager’s role is to minimize the impact of loss on other persons.
Thus, there are the pre-loss and post-loss objectives of risk management. A prudent risk manager must keep these objectives in mind while handling and managing the risk.
Other objectives of risk management includes:
- Develop a common understanding of risk across multiple functions and business units so we can manage risk cost-effectively on an enterprise wide basis.
- Achieve a better understanding of risk for competitive advantage.
- Build safeguards against earnings-related surprises.
- Build and improve capabilities to respond effectively to low probability, critical, catastrophic risks.
- Ensure the management of risk is consistent with and supports the achievement of the strategic and corporate objectives.
- Initiate action to prevent or reduce the adverse effects of risk.
- Minimize the human costs of risks, Where reasonably practicable.
- Meet statutory and legal obligations.
- Minimize the financial and other negative consequences of losses and claims.
- Minimize the risks associated with new developments and activities.
- Be able to take informed decisions and make choices on possible outcomes.
- To comply with the relevant health and safety legislation, and
- Decrease the level of the occupational injuries and the ill health.