1.3 Benefits of Risk Management

All organizations operate in a world filled with risk. The practice of effective risk management will not only provide benefits to individual organizations but also to the economy.

Consider an established manufacturing plant in a small town in Ontario, Canada, employing most of the town’s population. The local economy is advantageously affected by the continued success of the manufacturing plant as residents have mortgages, loans and income to spend, all dependent on the viability of the plant. Now consider a scenario where a fire causes the plant to shut down for an extended period, resulting in a decision to delay the re-opening, move it to another location or keep it permanently closed. This disruption to the economy creates systemic risk within this market as the loss of income to residents will prevent them from making good on loans, mortgages, and debts. A spin-off effect caused by the lack of revenue generated by local businesses after the fire may force these businesses to close.

Benefits of Risk Management for Organizations

• Managing Cost of Risk. Cost of risk is the total cost incurred by an organization because of the possibility of accidental losses. These could be costs associated with accidental losses not covered by insurance or other outside sources. Cost of risk also includes loss prevention activities (employee training), loss reduction activities(sprinkler systems) or the cost of administering risk management activities.
• Reducing Uncertainty. A risk adverse organization may be reluctant to undertake activities that are too risky, depriving the organization of potential benefits. The downside of risk cannot be eliminated, but its uncertainty can be managed by implementing strategies. Risk management can reduce the uncertainty of undertaking activities, which can increase profit and attract investors by making the company more attractive to suppliers of investment income.
• Informed Risk Taking. Opportunities based on the organization’s risk appetite should be recognized and selected. The risk of pursuing the opportunity should be compared to the risk of not taking the opportunity, always keeping in mind the concept of risk versus reward.
• Profitability. Effective risk management can help the organization evaluate the risks and their potential returns while keeping within the boundaries of the organization’s objectives and risk appetite.
• Integrated Risk Management. The implementation of Enterprise Risk Management will result in better decision-making and improved outcomes by providing the organization with a complete picture of its risks and how one risk can impact another risk.
• Regulatory Compliance. Adherence to regulatory and compliance risks associated with laws and reporting requirements will allow auditors to report on an organization’s risk management processes in support of mandatory obligations.

Benefits of Risk Management for the Economy

• Minimizing Systemic Risks. The inability to implement effective risk management by an organization can result in a failure not only for the organization but for the economy itself, as described in the opening paragraph of this section.
• Retaining Resources. An accidental loss such as a natural disaster or a fire could adversely affect quantities of available resources and, subsequently, an organization’s ability to manufacture products. Allocating resources to risk management is a cost that could minimize the effects on or loss of productive resources.
• Reducing Economic Resources. The implementation of effective risk management will relieve the burden of uncertainty placed on an organization and the effects of its failures on the economy caused by the downside of risk. This will allow the organization to freely pursue activities intended to maximize profits, wages and return on investments.