Running corporations would be a lot easier if businesses had the assurance that there were no associated risks and this is only possible with the right annual risk assessment process and template. Risk is an integral part of managing a successful business. The traditional view of risk is that companies should work to avoid it. In today’s corporate world, risks are prevalent, complex and deeply interconnected. In particular, cyber risk poses a huge threat to companies today, and there are a host of other risks to consider as well. There are five main ways to address risks and each of them is important in its own way in the annual risk assessment.
- Accept the risk
- Avoid the risk
- Transfer the risk
- Mitigate the risk
- Exploit the risk
The goal of an annual risk assessment process is to manage risk exposures across all people and departments so that they encounter the right kinds of risks and manage them well so that they can pursue their strategic goals and a return on their investment.
The Importance of An Annual Risk Assessment
A risk assessment is important because it gives companies insight into the potential effect of risks in relation to achieving their goals.
Businesses need to develop risk assessment processes that are practical, comprehensible and easy to maintain. A well-planned annual risk assessment plan accounts for the size of the company, its degree of complexity and the geographic span of its customers. As enterprise-wide approaches to risk management are becoming the norm, new models for risk management are evolving.
Annual Risk Assessment: Process & Template
The steps in risk assessment are:
- Identify risks
- Develop assessment criteria
- Assess risks
- Assess risk interactions
- Prioritize Risks
- Respond to risks
During the process of identifying risks, the goal is to identify as many risks as possible and to use a risk assessment process to prioritize the key risks. An annual risk assessment template is a valuable tool as risk managers perform their risk assessment.
Some risks are unique and prevalent. These types of risks will require continuous monitoring and assessment to prevent a crisis. For example, cyber risk is an example of a dynamic, ongoing risk. There will always be certain types of risks associated with the market and production as well.
Static risks are risks that cause damage or loss, not because of the economy or market conditions, but because of destructive
human behavior or an unexpected natural event. An example of this is an employee who unintentionally clicks on a computer link that’s infected with malware. Insurance is one way to mitigate against static risks. Risk managers monitor these types of risks
continually and reassess them periodically, especially if circumstances have changed.
In the risk identification phase, risk management staff develops a comprehensive list of risks and puts them into categories and sub-categories. The full list provides a snapshot of risk possibilities. This process will likely also produce some identified areas for opportunities. The risk identification process should be repeated for business units, corporate functions and capital projects.
Develop Assessment Criteria
To assess risk, there must be some sort of criteria and some sort of scale for rating it. When developing the criteria for risk assessment, it’s important to formulate a common set of criteria that the company can apply across business units, corporate functions and large capital projects.
Typically, risk management teams categorize risks and opportunities by the impact they could produce and the likelihood that they could happen. Risk management teams may also evaluate risks according to how vulnerable the company is to them and how quickly the company could be affected by a serious risk.
The issue with this theory is that unlikely events do occur, often when companies are ill-prepared to address them. Unlikely events seem to hit companies fast and without warning, which makes the impact even greater. Even though some events are expected and likely, they don’t just happen. Since likelihood and impact don’t encompass a complete risk assessment, it’s important to consider additional assessment criteria.
An effective risk assessment program should also answer questions like how quickly a risk could surface, how fast the company could respond to it and how much downtime would be disastrous to recovery. These questions point to how vulnerable the company is and what its risk management needs are.
Assessment scales gives companies a standard of comparison so that they can compare risks across their operations. Every company is uniquely different, and their risk assessment process should fit the size of the company, the industry and the company’s culture.
Risk managers assess risks individually and collectively. In looking at the big picture, risk managers are charged with measuring and prioritizing risks so that they can manage them within a defined risk tolerance threshold. The process of assessing risks helps to highlight the most important risks and opportunities and lay the groundwork for risk response.
This phase of the risk assessment plan requires assigning values to each risk and opportunity using the defined criteria in the previous phase.
Generally, risk managers will do an initial screening of the risks using qualitative techniques like interviews, surveys and benchmarking. A qualitative assessment entails assessing risks and opportunities based on the rating scales that were decided on in the assessment criteria process.
Risk managers will then make a quantitative analysis of the most important risks by assigning numerical values for impact and likelihood of the risk occurring. Quantitative measures may include scenario analysis, point estimates and forward-looking models. The accuracy and comprehensiveness of the risk analysis will ultimately determine the overall quality of the risk assessment process.
Assess Risk Interactions
Risks don’t mysteriously occur without the assistance of ancillary influences. It’s important for risk managers to look not only at each risk, but also at each risk’s interactions with other conditions and events. Risks that seem insignificant on their face may explode under the right set of circumstances. Minor risks, when intercepted by other situations, may burst with amazing opportunities.
For this reason, risk managers must look beyond the risk matrices and view their list of risks in light of how they interact with other risks so that they can see the entire scope of the company’s risks. One way to do this is by using a risk interaction map where the same list of risks forms the “x” and “y” axes. Mark the intersection of risks that interact with each other.
Prioritizing risks is a process that sets up risk priorities by comparing the level of risk against the company’s risk tolerance threshold.
After reviewing and documenting the interactions between risks, the risk management team will have a portfolio of risks. This is an important step for prioritizing risks so that the team can set up plans for risk response and reporting to stakeholders. Risk profile is a term that exemplifies the entire portfolio of risks for the company.
With so much information to prioritize, it’s helpful to have some sort of tool to help in the prioritization process. The most common tools are to list the risks according to hierarchy, plot them on a heat map or aggregate individual risk distributions into a cumulative loss probability distribution.
At this point, it’s helpful to use a two-step process. Teams may decide to rank risks according to impact rating multiplied by likelihood rating. Instead, they may opt to rank risks by multiplying impact by vulnerability. The second step is to factor in other issues like impact on its own, speed of onset or the gap between the current risk level and the desired risk level, which is the risk tolerance threshold. Risk management teams may also consider taking qualitative factors into consideration.
Respond to Risks
The next step in the annual risk assessment process is to make decisions on how to respond to the risks that you’ve now identified and prioritized. As noted earlier, there are five ways to respond to risks —accept, avoid, transfer, mitigate and exploit.
For the key risks that were identified and prioritized, the risk management team’s next task is to perform a cost-benefit analysis. From there, the team can formulate a response strategy and develop an appropriate response plan for each key risk.
Board Management Software Is the Modern Approach to Risk Management
The most effective risk management programs are not only comprehensive, but they’re practical and easy to understand and to implement. One of the biggest challenges for risk management teams is to find the balance between simplicity and inclusiveness.
Even the best risk management plan won’t be sustainable without the support of the executives and the necessary resources. Risk management teams must have the right skills and access to the right technology that’s designed for the size of the task.
In considering a modern governance approach to an annual assessment, the final outcome is data that should be useful to leaders at every level as they make decisions. Board management software uses automation as much as practicable to document board activities associated with corporate governance, risk assessment and management, and regulatory compliance. Diligent Boards and the digital tools that comprise Governance Cloud are the most secure way to communicate and to share files electronically as risk management teams complete this important work.