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Friday, 09 June 2017 08:35

Risk management schools of thought Featured

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Risk is a wide concept that permeates almost every aspect of human existence. The body of knowledge on risk is extensive. It includes diverse functions as insurance, decision-making, probabilistic rick analysis, risk control and loss prevention, finance, accounting, internal audit practices, the science of failure, business strategy, psychology, risk-taking, the social sciences and corporate failure studies.

To facilitate a meaningful discussion on risk management it is vital to understand these four main risk management schools of thought; Pure risk, Financial risk, Corporate failure and Risk-taking. The following is an overview of the various risk management schools of thought.

Pure risk

The pure risk school of thought includes the practices of insurance and risk finance, loss prevention and risk control. Specialised bodies deal with subsets of risk control such as:
•    security
•    fraud prevention
•    human safety
•    environmental management
•    legal risk
•    fire engineering
•    engineering reliability and safety
•    emergency preparedness
•    crisis management
•    occupational health and hygiene.

There are also specialists focusing on the science of risk analysis in this school. Pure risks are bound by a common principle: that they are concerned only with risks that can manifest themselves in the form of a loss of some kind. A fundamental principle of this school is that the party cannot benefit from a pure risk.

Financial risk

Financial risk is concerned with the risk associated with money in its different forms. It is rigorously quantitative in nature and includes risks associated with:
•    credit
•    equity
•    currencies
•    commodities

These different types of financial assets have distinct risk processes, but they often integrate with one another.
It is also sometimes difficult to distinguish risk-taking from risk treatment in the context of financial risk, because the two are so interwoven. Risk treatment often requires risk-taking action in the field of financial risk management.

The financial risk field is characterized by a high degree of information technology involvement, which has become an essential enabler of risk management measures, as well as contributing hugely to the globalization of financial risk as a discipline.

Corporate failure

Corporate failure as a distinct risk management school of thought concerns itself with the risks of corporate failure or collapse. This school maintains that extreme outcomes such as bankruptcy of a corporate company can be predicted, prevented and managed. The corporate failure school generally predates the emergence of corporate governance in business, although the two are closely related.

Corporate failure analysis exhibit many of the constructs that are prevalent in other schools of risk management thought. The identification and quantification of causes of failure, recommended best practice for prevention of failure and financial solutions are all part of the corporate failure framework.

The rise to prominence of corporate governance, and its close association with risk, has brought the ideas associated with corporate failure into the arena of risk.

Risk-taking

The risk-taking school of thought is fundamentally different from the three mentioned above because it deals exclusively with the positive process of moving forward towards a desired benefit.
Risk-taking is the logical start of the risk dynamic as taking risks creates risk exposures. The field of risk management, in all forms, makes the broad assumption that an individual or group of individuals takes risk for gain. Therefore, risk-taking is the logical start of the risk dynamic as taking risks creates risk exposures.

The conventions of risk management usually focus most of their attention on controls, protection and prevention, with little attention given to enhancing the achievement of possible outcomes.

The field of risk-taking is varied in its range of subject matter. The richness of the risk-taking school of thought makes it an essential part of the quest for enterprise-wide risk management consistency.

We trust this overview of the four risk management schools of thought broadens your thinking on risk management and the desire to find the best solutions for managing risk. Contact your broker today to find out how Quanta Insurance can ensure solutions which insure tomorrow.

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More in this category: 3 Must watch TED Talks about risk »

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At Quanta we care about you and ensuring you have all you need to be adequately insured and able to mange your risks effectively.
Feel free to join our mailing lists to receive our monthly Quanta newsletter with updates, news, events, new product info, promotions, blog updates and much more.
You may unsubscribe at any time via the link at the bottom of emails received or on our website.
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