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Risk Assessment

Updated on January 5, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Risk Assessment?

Risk assessment refers to the determination, analysis, and mitigation of potential hazards that may lead to the loss of lives, assets, investments, loans, or business operations. The main aim of risk assessment is to prevent the occurrence of inherent business or investment risk so that its negative impact on business operations can be removed. 

Risk Assessment

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It also equips a firm to prepare itself for and combat risks in the future. All investors, governments, and businesses assess risk before fresh projects, investments, and businesses. In case of investment into highly volatile security represents a riskier investment, so it does not assure guaranteed profits in the future. Many companies use the risk assessment framework (RAF) for implementing the same.

Key Takeaways

  • The risk assessment identifies, analyzes, and reduces possible risks that might result in the loss of people, property, investments, loans, or company operations.
  • Its primary goal is to foresee inherent business or investment risk before it arises in order to minimize its negative effects on corporate operations, sales, revenue, and brand.
  • It has five steps – hazard identification, deciding impact and subjects, risk evaluation, recording the findings, and assessment review. Plus, it is of five types – Dynamic Risk Assessment, Site-Specific Risk Assessment, Generic Risk Assessment, Quantitative Risk Assessment, and Qualitative Risk Assessment.
  • It is a subset of risk management and is just information on risk, but Risk Management is the basic plan for risk handling, whereas Risk Analysis is the processing of risk.

Risk Assessment Explained 

Risk assessment is a systematic method of planning and strategizing to reduce the probability of any potential hazards that can interrupt business operations. This can be an injury or loss of life, damage to property, loss of investment, or destruction of plant & machinery of a business, leading to proper control of risk at a business or factory. It usually is legally mandatory and managed by a competent person related to risk analysis. Risk analysis is important for the safety of the workforce and plant and machinery.

Various organizations in the USA, like OSHA (Occupational Safety And Health Administration), have made it obligatory for firms. The assessment is generally carried out for: 

  • Determining the subjects that will be affected
  • Existing methods of risk control
  • Any further requirements to control the risk
  • Competing person to carry out the action of risk control
  • The right time to carry out the assessment.

An organization carries out assessment only with the:

  • Addition of new processes in the workflow 
  • Existing processes get some changes
  • New hazards arise due to new tools or equipment.

Furthermore, auditors of a company may also perform the same during planning for an audit procedure. Companies widely use risk assessment templates for fire risk assessments and suicide risk assessments. 

Investors also use a risk assessment matrix to determine the level of hazards involved in investment avenues. They use quantitative and qualitative methods of assessing risk for their investments. 

  1. Quantitative Method: Here, investors make use of risk assessment matrices and simulations for assigning risks with numbers. It helps in discovering all possible outcomes.
  2. Qualitative Method: It is based on a person’s experience and subjective judgment in deciding about creating an appropriate risk model for a specific situation. It comprises taking into account the evaluation of a business’s management, its vendor relationship, and brand image in the eyes of the public to assess the risk and form an opinion about it.

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Steps

Companies deploy the risk assessment strategy to determine and prepare for possible risks to mitigate potentially disastrous outcomes in the future and safeguard their workforce. In order to conduct the assessment, there are five major steps to be followed:

  • Identification of hazards
  • Deciding who and how much the subjects would be harmed
  • Evaluation of risks and then deciding upon the necessary precautions
  • Recording all the findings so as to implement the steps successfully
  • Reviewing the assessment periodically and then updating it as per the requirements

Types

One can find five types of risk assessment being used in non-financial sectors: 

#1 – Qualitative

It is a process where the occurrence of the risk and its impact on a specific project gets analyzed. Using this method, project managers get help in risk prioritization as per their impact and probability while also allowing them to identify the major sectors of risk vulnerability plus improve their understanding of the risks of projects. It depends on an individual’s experience in risk handling and consultation with other stakeholders of the project

They subdivide the risk into high, medium, and low levels, corresponding to the degree of risk. 

Here, risk= severity * likelihood

#2 – Quantitative

Here, the risk level is denoted by numbers starting from zero to ten. Every number denotes the increasing degree of risk of the project. The method gets used in projects with huge impacts, like nuclear plants, complex chemical factories, and aircraft design. 

#3 – Generic

It acts as a common risk assessment template applicable in similar activities or machinery used in different firms, sites, or departmentsIt has its base in the Management of Health and Safety at Work Regulations (1999), which makes employees assess those risks which emanate from their workplace activities.

#4 – Site-Specific

As the name suggests, this assessment method highly depends on the particular site for which it has been formulated. It cannot be used for risk assessing in other sites or locations or activities other than for which it was devised, taking into account their location, site condition, and project type.

#5 – Dynamic

It is useful in assessing unknown risks, and one needs to handle the uncertainty. Emergency service workers, healthcare workers, or disaster management teams mostly use it. These assessments have to be carried out on the spot, like in the case of accidents.

Examples

Let us understand the topic using some examples.

Example # 1

Suppose a slipper factory in Ohio has not conducted the risk assessment for a while, overlooking the laws of the land. However, one factory worker got injured, and the factory was fined heavily by the regulators for not conducting an assessment of potential work hazards. 

Example # 2

Recent research published under the title – Machine learning-enabled regional multi-hazards risk assessment considering social vulnerability on August 17, 2023, regarding the risk assessment. The research highlights the vital role of social susceptibility in holistic risk assessment. It indicated that areas having high vulnerability are more prone to natural calamities. It proposes an integration of machine learning to map major hazards like flooding, wildfires, and seismic activities.

Hence, the above-mentioned extensive risk map underscores regions with heightened weaknesses to the risk and spatial patterns. Moreover, the research findings emphasized the importance of effective risk assessment techniques for reducing natural catastrophe impacts globally. Furthermore, another comparable research in China used artificial intelligence to forecast earthquakes, wildfires, and flooding. As a result, the research recommended the Random Forest model to get multi-hazard risk forecasting.

Importance

The importance of risk assessment can be summarised in the below points:

  • It helps in avoiding staff injury or loss of lives also.
  • In its absence, workers may feel unsafe working at an institution
  • Workplace accidents cost a huge sum for the company if a proper risk assessment is not in place.
  • It reduces the legal burden on the business when any untoward incident happens during the operation of machinery by workers.
  • Finally, it allows a business to find the safest process of operation, leading to the higher efficiency of both plants and humans. 

Risk Assessment vs Risk Management vs Risk Analysis 

Let us use a table to understand the difference between them:

Risk AssessmentRisk ManagementRisk Analysis
It is a subset of risk management and is just information on risk.The basic plan for risk handling.Processing of risk.
Focuses on hazard detection.Handles risks across the agency.Here every step is properly defined.
Analyses all the possible risks present in the workplace.Consists of multiple levels.One of the steps of risk management.
Meso-level process.Must align with firm strategyMicro-level process.
Is need-based processIt is an ongoing processIt is not an ongoing process.
No involvement of managementHigh involvement of managementNot required
Not needed to alignMust align with firms strategyNo such requirements

Frequently Asked Questions (FAQs)

1. What are the 5 key areas of a dynamic risk assessment?

Risk assessment could be done by either self or by taking the help of a professional. However, one must remember that there are five key elements of dynamic risk assessment, as listed here:
· Hazards identification
· Risks assessment 
· Controlling the risks
· Recording all the findings obtained
· Reviewing the controls

2. Is risk assessment a legal requirement?

In most countries, risk assessment comes under legal obligation on a firm. Nevertheless, it doesn’t need to be burdensome for an individual or a business. It is because it helps one to get a vivid picture of the manner of application of law into the business, the importance of the risk assessment, and most importantly, it tells us what actions have to be taken to be on top of the business risks.

3. When should risk assessments be carried out?

There is a multitude of situations where a firm needs to conduct the assessment of risks:
· Once the fresh process or activity has to be introduced into a system
· Before introducing any change to ongoing activity or process
· When the business has to overhaul its machinery, products, equipment change, or tools,
· Whenever a firm receives information regarding harm.

4. How often should risk assessments be reviewed?

For a healthy business and its processes, experts have recommended conducting the assessment of risk on an annual basis.

This has been a guide to what is Risk Assessment. We explain its examples, steps, types, comparison with risk management and analysis, and importance. You can learn more about it from the following articles –

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