The Cost of Risk - Paper Example

Published: 2021-08-16 10:28:14
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Cost of risk is described as the cost which is involved in the management of risks and losses incurred due to uncertainty. It can be calculated for a specific financial period or forecasted for the future. There are common elements of risk. One of them is administration costs. It involves the cost that one incurs in risk management, for example, the budget that a risk management team requires. Secondly is mitigation costs which are costs incurred in risk reduction. An example of this is a firm which buys specialized software and hardware to cut down on information security threats. Thirdly there are risk control costs (Spacey, 2017). These are costs involved in operation processes which are specialized in risk reduction for example credit checks which are run on customers. Fourth is transfer costs. These are costs involved in the transfer of risks using methods such as financial instruments or insurance. The last type of cost of risk is losses. These are incurred because of the occurrence of a risk. For example, a customer who fails to pay for services rendered or goods delivered is a loss because of credit risk.

Every aspect of an organization affects the cost of risk of an organization. Quantifying all the costs of risk of an organization is hard. Cost of risk describes both speculative and pure risk. It also goes hand in hand with price regarding ones risk management program. A good risk management program four main asset categories of business. These are net income, personnel, organization, and property.

To determine the price of the risk management program one must subdivide the structure further. One has to do consider the four main principles. One of this is the identification of exposure to scrutiny, implementing control measures to exposures, risk financing or transfer and lastly the management of future and current exposures.

Fire and engineering risk control

Fire engineering involves the application of engineering and science principle to shield property, the environment and people from destructive and harmful effects of smoke and fire. It involves fire protection engineering that focuses on detecting fire, suppressing, mitigating and fire protection engineering. It focuses on the human behavior and the maintenance of a reasonable environment for escape from a fire.Risk control, especially in fire and engineering, needs a layout or a plan. This is dependent largely on already established procedures, policies, and local considerations. The layout should be a formal and written document. It should help identify areas which need attention, track, and issue organizational changes. The document should have specific sections, for example, the purpose, scope, and content, how the plan is organized showing some control measures and the objectives and goals of the plan ("What is maintenance?", 2012).

Hazard Control hierarchy is a system that is used in an industry to eliminate or minimize hazard exposure. It is a system that is widely promoted by many safety organizations. It is taught to industry managers to be encouraged as a workplace standard practice. In the hierarchy, the hazard controls are arranged according to decreased effectiveness. They are elimination, replacement, engineering processes, administrative controls, and protective (personal) equipment.

There are various legal requirements put in place when a building is constructed and its operation life. Examples are the presence of adequate fire exits, electrical codes, and a maximum number of occupants of a building, and suppression and fire detection equipment.

Maintenance entails taking care of the workplace, machines, furniture, facilities and equipment operating safely and efficiently, and in good repair. It includes tasks such as replacing, servicing, repair, testing and inspecting. It also involves keeping staff healthy, fit and safe.

Risk control

Risk control help organizations understand the risks which they might be exposed to, controls to put in place and how to counter those risks while at the same time pursue their mission. There are four risk control techniques. The first is avoidance which is the best method. It involves completely avoiding the risk as the name implies. The second technique is loss prevention which is a method that limits loss rather than eliminating it. This technique rather than avoiding the risk completely attempts to minimize the loss that it will cause. The third technique is loss reduction. It accepts that a risk will occur and also that it might happen because of the risk. Loss reduction aims to minimize a loss that might occur in case of a threat.

Separation is the fourth risk reduction technique. It involves disbanding key assets. It helps if something bad happens in one location then only the assets of that location will be affected and not of the whole company. If all assets were at that one location, the business would face a serious challenge. Duplication is another risk control method. It involves having a backup plan and most times involves the use of technology. For example, a server should not bring the business to a stop. If the primary server fails, a backup server should be readily available. Diversification is the last risk control technique. It spreads business resources to make many business lines that offer a range of services and products in different industries ("6 Fundamental Techniques of Risk Control"). The loss of revenue in one line of business may cause irreversible harm to the whole company.

Risk control is a key aspect of the strategy of any sound company. Ensuring the long-term profitability and sustainability of an organization is important.

References

6 Fundamental Techniques of Risk Control. (n.d.). Retrieved December 08, 2017, from http://www.pomsassoc.com/6-fundamental-techniques-risk-control/

Spacey, J. (2017, April 13). 5 Examples of Cost Of Risk. Retrieved December 08, 2017, from https://simplicable.com/new/cost-of-risk

What is maintenance? (2012, December 18). Retrieved December 08, 2017, from http://www.healthyworkinglives.com/advice/work-equipment/maintenance2/maintenance

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