After reading this article, you’ll understand everything about risk management (RM), risk monitoring, and risk mitigation.
Role of the board in risk management
The board of directors plays a key role in RM as it is responsible for overseeing the management of risks within an organisation. The board has a number of responsibilities in this regard, including:
- Setting the tone for the organisation’s RM culture and policies.
- Establishing the organisation’s risk appetite, which is the level of risk that the organisation is willing to accept.
- Reviewing and approving the organisation’s RM strategy and plans.
- Ensuring that the organisation has the necessary resources, including personnel and funding, to effectively manage risks.
- Receiving regular updates and reports on RM activities and their results.
Role of the risk manager
The risk manager is responsible for overseeing the day-to-day management of risks within an organisation. This includes identifying potential risks, assessing their likelihood and potential impact, and implementing strategies to manage those risks. The risk manager may also be responsible for developing and maintaining RM policies and procedures, and for reporting on RM activities to senior management and the board of directors.
Role of the risk committee
The risk committee is a group of individuals within an organisation who are responsible for overseeing the risk management process. The risk committee typically includes senior executives and other key stakeholders, and may be responsible for tasks such as reviewing and approving the organisation’s risk management (RM) strategy and plans, receiving regular updates on risk management activities, and providing guidance and support to the risk manager. The risk committee plays a key role in ensuring that RM is integrated into the overall decision-making and strategic planning processes of the organisation.
Embedding risk refers to integrating risk management into the day-to-day operations and culture of an organisation. It involves making risk management an integral part of the way an organisation does business, rather than treating it as a separate activity.
Embedding risk in systems involves integrating risk management (RM) into the systems, processes, and practices of an organisation. This might include things like incorporating risk assessment into decision-making processes, or implementing controls and monitoring systems to manage identified risks.
The process of embedding risk typically involves the following steps:
- Identify the risks: This involves identifying the potential risks that could affect the organisation, including both strategic and operational risks.
- Assess the risks: This involves evaluating the likelihood and potential impact of identified risks.
- Prioritise the risks: This involves ranking the identified risks based on their likelihood and potential impact, to determine which risks should be addressed first.
- Implement risk management strategies: This involves selecting and implementing strategies to minimise, monitor, and control the identified risks.
- Monitor and review: This involves regularly reviewing and monitoring the effectiveness of risk management strategies, and updating them as necessary.
To embed risk in culture, organisations should encourage a culture of risk awareness and risk management at all levels of the organisation. This might involve things like providing training and education on risk management, promoting a culture of transparency and open communication about risks, and encouraging employees to report and address risks as they arise. Other strategies for embedding risk in culture might include involving employees in RM activities, recognising and rewarding employees for taking appropriate risks, and making risk management an integral part of the organisation’s values and mission.
Explain: risk mapping, RM strategies, diversify risk, risk monitoring, assurance mapping and risk management, the four lines of defence model
Risk mapping is the process of visualising the risks facing an organisation, typically by plotting risks on a grid or matrix. The risk map typically plots risks along two axes: likelihood and impact. The likelihood axis reflects the probability that a particular risk will occur, while the impact axis reflects the potential consequences of the risk. Risks that fall into the top right quadrant of the risk map are considered to be the highest priority, as they have both a high likelihood of occurring and a high potential impact. Risk mapping is a useful tool for identifying and prioritising risks, and for communicating risk information to stakeholders.
Risk management strategies
Risk management (RM) strategies are the actions that an organisation takes to minimise, monitor, and control the risks it faces. These strategies may include a variety of approaches, such as implementing controls and monitoring systems, diversifying risk, and purchasing insurance. Some common risk management strategies include:
- Risk avoidance: This strategy involves avoiding activities or situations that pose a high risk to the organisation.
- Risk reduction: This strategy involves taking steps to reduce the likelihood or impact of identified risks.
- Risk transfer: This strategy involves transferring the risk to another party, such as through the use of insurance.
- Risk acceptance: This strategy involves accepting the risk as it is, and taking no further action to mitigate it.
Diversifying risk involves spreading risk across multiple assets or sources, in order to reduce the impact of a particular risk on the organisation. For example, an organisation that relies on a single supplier for a critical component may diversify that risk by sourcing from multiple suppliers.
Risk monitoring is the process of regularly reviewing and monitoring the risks facing an organisation, and taking appropriate action to manage those risks. This might involve things like reviewing risk management plans and strategies, reviewing the effectiveness of risk controls, and identifying and addressing new or emerging risks.
Assurance mapping and RM involves mapping the assurance activities of an organisation to the risks facing the organisation. This helps to ensure that the organisation has appropriate assurance in place to manage identified risks, and that assurance activities are aligned with the organisation’s risk management strategy.
Four lines of defence model
The four lines of defence model is a framework for managing risk that involves four distinct layers of risk management (RM):
- First line of defence: This is the first layer includes the day-to-day activities that individuals within the organisation undertake to manage risk.
- Second line of defence: This is the second layer includes the risk management function and other specialised risk management activities.
- Third line of defence: This is the third layer includes independent assurance activities such as internal audit.
- Fourth line of defence: This is the fourth layer includes external oversight bodies such as regulatory agencies.
The four lines of defence model helps to ensure that RM is integrated into the overall decision-making and operations of an organisation, and that there are appropriate checks and balances in place to manage risk effectively.
Read more about risk identification, risk assessment & risk measurement.