Integrated Risk Management

A manager generally perceives that risk management is all about financial risk management. Three main reasons for this perspective are as follows:

• Bulk of literature in risk management area is about financial risks and financial analysis.
• Risk management is integrated to financial theory. This is because of the analytical and statistical problem surrounding risks.
• Application of risk management techniques is seen more in banks and finance-service organizations.

An integrated approach to risk management is required. Such an integrated approach will cover risk management practices not in one area of the organization, but through out the entire organization. Initiating risk management practices in a business organization is a difficult task. The reason is that the applications vary from industry to industry. Finding an application suitable to a particular industry is a challenge.

"What we need is not risk management, but strategic thinking,” says Mr. Jack J. Hampton, Executive Director, Risk and Insurance Management Society, New York. He emphasizes that there is a need to look at risk management from a broader, integrated perspective. The risk manager has to link the customer, the product and risk exposures and then determine how they can be best managed.

So limited is the understanding of risk management subject that there is not even a generally accepted definition of ‘risk’. It is worth to state definitions of the three key terms. These are as follows:

Risk- Unpredictability in corporation/business outcome variables

Uncertainty- Unpredictability of environmental and organizational variables, which impact the corporation/business performance

Exposure- sensitivity of a firm’s/project’s cash flow to the change in interrelated uncertain variables