Risk Management is concerned with mitigation of potential losses from hazards and fortuitous events. There are five steps to follow for risk management:
Step 1 - Risk identification: Identification of loss causing events e.g. flood, storm, fire, burglary, accidental.
Step 2 - Risk evaluation: Determination of the frequency and magnitude of losses. These may be classified as 'small', 'medium' or 'large' losses with 'high frequency' ( e.g. minor losses) or 'low frequency'( e.g. flood , earthquake, explosion).
Step 3: : Selecting Techniques: Select appropriate techniques or methods to manage the risks. These are
(a) Risk avoidance: The simplest way of dealing with risk to avoid it.
(b) Loss Prevention and Reduction: These are measures to prevent losses or reduce the extent of loss.For example; installation of fire extinguishing appliances, automatic sprinklers.
(c) Risk retention: Small losses are absorbed by the normal operating expenses and large losses met by 'self - insurance fund'. The insured may opt for voluntary excess or deductibles within the insurance policy.
(d) Risk transfer: Risk transfer is done by sub - contracting of some hazardous processing, by contracts with third parties and contractors and by insurance.
Step 4 - Implementation: The techniques preferred and chosen by the risk managers are implemented by the functional managers in the respective department like the production department, the sales and distribution department and so on.
Step 5 - Review of the results: The effectiveness of the methods are estimated by analyzing the portfolio performance. The evaluation is done periodically; monthly, half yearly or annually.