Corporate Risk Management: Comparing Strategies

Corporate Risk Management: Comparing Strategies

The corporate risk manager is obliged to consider various risk strategies and combine them in effective ways. Some companies prefer a small number of strategies that are targeted towards their specific needs, while others prefer to handle risks by using every possible strategy in order to minimize the variety of risks involved.

Identifying and quantifying risks are the most common strategies used by all companies, as no other strategy would be possible without these first two steps. Identifying risks refers to determining the risks that exists for a specific company. This is vital in order to determine the type of risks that a company faces and must deal with. Quantifying risk is a necessary step that follows the identification process. This means that risks are assigned priority according to its imminence and severity for the specific company and its situation.

Some companies prefer to focus on preventing risks rather than being obliged to handle the effect of the risk factor once an accident or other disaster occurred. The two strategies mentioned above are particularly vital to make this strategy a success. It is necessary to identify and quantify all possible risks and, as far as possible, avoid the unknown factor in risk identification. Risks that are unknown cannot be prevented.

When there are many risks for a company, some risks are created in the process of assessing and mitigating others. In this, the quantification strategy is important. High-priority risks will enjoy precedence over low-priority risks, even if additional risks are created in the process. This is particularly a factor where a company carries many unknown risks. Unknown risks may for example be created in an attempt to prevent high-priority risks. In such a case, risk assessment and prevention are a learning process.

Buying and selling risks mainly pertain to companies working in the financial field. In such a case, a company carries significant risks on behalf of its customers. Advisers for example survey the market and make recommendations to their customers on the strength of such estimations. Such investments carry a high level unknown risks, depending upon the type of investment a customer prefers to make. Some customers prefer higher risks for higher returns, while others are more careful with their investments. In such a company, risk quantification and creation play a more important role than risk prevention.

Diversifying risks in the financial business is a strategy that mitigates the risk of investment. The strategy entails diversifying the number and types of investment made in order to minimize the risk of financial loss for the client. Such a strategy is useful in high-risk and high-return types of investments.

Concentrating risk is the opposite strategy of diversifying risk in the investment business. This strategy carries a high risk of loss, but also a high possibility of return if successful. It could also be used in combination with the diversification strategy in order to optimize an investor's possibility of return, while safeguarding some of the investor's portfolio. This strategy is referred to as hedging. When hedging risks, a company or person makes an investment specifically to reduce the risk of another investment.