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A Risk Management Standard

IRM: 2002 . ALARM.Published by AIRMIC.

would be impossible to try to set them all out in a single document. component parts of this standard. Introduction This Risk Management Standard is the should be viewed not just in the context of result of work by a team drawn from the the activity itself but in relation to the major risk management organisations in many and varied stakeholders who can be the UK . ALARM. A Risk Management Standard © AIRMIC. but back cover of this Guide).The Association of Insurance and Risk Managers (AIRMIC) There are many ways of achieving the and ALARM The National Forum for objectives of risk management and it Risk Management in the Public Sector.Therefore it was In addition.The benefits and opportunities the standard in the light of best practice. Management (IRM). from organisations as they put the standard Risk management is not just something for into use (addresses to be found on the corporations or public organisations. organisations will be in a discipline and there are many and varied position to report that they are in views and descriptions of what risk compliance.The Institute of Risk affected. during an extensive period certifiable process. the standard recognises that area the authors would appreciate feedback risk has both an upside and a downside. of standard is needed to ensure that there is The standard has wherever possible used an agreed: the terminology for risk set out by the • terminology related to the words used International Organization for • process by which risk management can be Standardization (ISO) in its recent carried out document ISO/IEC Guide 73 Risk Management . how it should be practice against which organisations can conducted and what it is for. the team sought the views and never intended to produce a prescriptive opinions of a wide range of other standard which would have led to a box professional bodies with interests in risk ticking approach nor to establish a management.The standard represents best management involves. Some form measure themselves. It is intended for any activity whether short or long that regular modifications will be made to term. • objective for risk management In view of the rapid developments in this Importantly. By meeting the various of consultation. IRM: 2002 1 .Vocabulary .Guidelines for • organisation structure for risk management use in standards. albeit in Risk management is a rapidly developing different ways.

and reduces both The risks facing an organisation and its the probability of failure and the operations can result from factors both uncertainty of achieving the organisation’s external and internal to the organisation. focused on prevention and mitigation of harm. It must translate the their activities with the goal of achieving strategy into tactical and operational sustained benefit within each activity and objectives. It and internal drivers and therefore overlap should address methodically all the risks the two areas. In all types of undertaking. It supports accountability. there is the In the safety field. perspectives. downside of all those factors which can affect the organisation. Risk Management Risk management is a central part of any It must be integrated into the culture of organisation’s strategic management. it is generally recognised potential for events and consequences that that consequences are only negative and constitute opportunities for benefit (upside) therefore the management of safety risk is or threats to success (downside). It increases the 2. throughout the organisation with each The focus of good risk management is the manager and employee responsible for the identification and treatment of these risks. management of risk as part of their job Its objective is to add maximum description. future. sustainable value to all the activities of the performance measurement and reward. Risk management should be a continuous The diagram overleaf summarises examples and developing process which runs of key risks in these areas and shows that throughout the organisation’s strategy and some specific risks can have both external the implementation of that strategy.1 External and Internal Factors probability of success. Risk Management is increasingly recognised as being concerned with both positive and 2. present and in particular.They can be categorised surrounding the organisation’s activities past.Therefore this the probability of an event and its standard considers risk from both consequences (ISO/IEC Guide 73). It marshals the thus promoting operational efficiency at understanding of the potential upside and all levels. Risk Risk can be defined as the combination of negative aspects of risk. etc. overall objectives. further into types of risk such as strategic. assigning responsibility across the portfolio of all activities. 2 A Risk Management Standard . hazard. 1. organisation. operational. financial. It is the organisation with an effective policy the process whereby organisations and a programme led by the most senior methodically address the risks attaching to management.

1 Examples of the Drivers of Key Risks © AIRMIC. IRM: 2002 3 .2. ALARM.

2 The Risk Management Process The Organisation’s Strategic Objectives Risk Assessment Risk Analysis Risk Identification Risk Description Risk Estimation Modification Risk Evaluation Formal Audit Risk Reporting Threats and Opportunities Decision Risk Treatment Residual Risk Reporting Monitoring Risk management protects and adds value to the organisation and its stakeholders through supporting the organisation’s objectives by: • providing a framework for an use/allocation of capital and resources organisation that enables future activity within the organisation to take place in a consistent and • reducing volatility in the non essential controlled manner areas of the business • improving decision making.2. planning • protecting and enhancing assets and and prioritisation by comprehensive and company image structured understanding of business activity. volatility and project • developing and supporting people and opportunity/threat the organisation’s knowledge base • contributing to more efficient • optimising operational efficiency 4 A Risk Management Standard .

and in a methodical way to ensure that all competitive technology. All associated volatility related to these health & safety. 3. interest rate movement and the legal. The objective of risk description is to • Operational . data categorised. for example. reputation 4. employment practices and regulatory issues. sovereign and political risks. • Strategic . trade activities should be identified and descriptions. knowledge resources.This the organisation and the effects of external requires an intimate knowledge of the factors such as availability of credit. environmental. protection. availability. foreign organisation. an in-house which include: approach with well communicated. exchange rates.These concern development of a sound understanding of its the effective management and control of the strategic and operational objectives. environment in which it exists. ALARM. the production. legal and regulatory changes. Internal factors might significant activities within the organisation be system malfunction or loss of key staff.These concern the day-to. External factors might include the unauthorised use or abuse of intellectual Risk identification should be approached property. display the identified risks in a structured day issues that the organisation is format. examples of out by outside consultants. Risk Analysis 4. consumer protection. political and cultural other market exposures. social. as well as the • Knowledge management .1 Risk Identification • Financial . IRM: 2002 5 . the market in which it operates. page 14) is likely to be can be affected by such areas as capital more effective. area power failures. threats and opportunities related to the achievement of these objectives.They tools (see Appendix.The confronted with as it strives to deliver its risk description table overleaf can be used strategic objectives. to facilitate the description and assessment © AIRMIC.2 Risk Description and changes in the physical environment.These concern the long-term consistent and co-ordinated processes and strategic objectives of the organisation. by using a table. Risk Assessment Risk Assessment is defined by the ISO/ analysis and risk evaluation. IEC Guide 73 as the overall process of risk (See appendix) 4.These concern such issues as flowing from these activities defined. In-house ‘ownership’ of the risk management process is essential. Business activities and decisions can be Whilst risk identification can be carried classified in a range of ways. have been identified and all the risks • Compliance .These concern the effective Risk identification sets out to identify an management and control of the finances of organisation’s exposure to uncertainty. including factors critical to its success and the protection and communication thereof.

Different organisations will find that quantitative or qualitative in terms of the different measures of consequence and probability of occurrence and the possible probability will suit their needs best. operational.3 Risk Estimation Examples are given in the tables overleaf. number and dependencies 3. description and assessment may be categorised as strategic.1). semi. Risk Treatment & Primary means by which the risk is currently managed Control Mechanisms Levels of confidence in existing control Identification of protocols for monitoring and review 8. needs and can be presented as a 3 x 3 matrix.of risks. of threats (downside risks) and medium or low is quite adequate for their opportunities (upside risks) may be high. it should be possible to prioritise the conceptual stage of projects as well as key risks that need to be analysed in more throughout the life of a specific project. 4. project/ process. their size. Nature of Risk Eg. financial. Potential Action for Recommendations to reduce risk Improvement 9. By considering the consequence and tactical. It is important to probability of each of the risks set out in the incorporate risk management at the table.The use of a well designed structure detail. consequence. medium or low but requires Other organisations find that assessing different definitions in respect of threats and consequence and probability using a 5 x 5 opportunities (see tables 4.Risk Description 1. type. Probability may be high. 6 A Risk Management Standard . Strategy and Policy Identification of function responsible for developing strategy Developments and policy 4.3.3. Scope of Risk Qualitative description of the events. medium or low (see table 4.3.1 Table . knowledge or compliance 4.2 and 4. matrix gives them a better evaluation. Risk Tolerance/ Loss potential and financial impact of risk Appetite Value at risk Probability and size of potential losses/gains Objective(s) for control of the risk and desired level of performance 7. Stakeholders Stakeholders and their expectations 5. operational. For example many organisations find that For example. Name of Risk 2. Risk estimation can be quantitative. consequences both in terms assessing consequence and probability as high. strategic. Identification of the risks associated is necessary to ensure a comprehensive risk with business activities and decision making identification. Quantification of Risk Significance and Probability 6.2.3).

2 Probability of Occurrence .Table 4. Medium Likely to occur in a ten Could occur more than once within the (Possible) year time period or less time period (for example .Both Threats and Opportunities High Financial impact on the organisation is likely to exceed £x Significant impact on the organisation’s strategy or operational activities Significant stakeholder concern Medium Financial impact on the organisation likely to be between £x and £y Moderate impact on the organisation’s strategy or operational activities Moderate stakeholder concern Low Financial impact on the organisation likely to be less that £y Low impact on the organisation’s strategy or operational activities Low stakeholder concern Table 4. 2% chance of occurrence. than 25% chance of Could be difficult to control due to occurrence.3. ten years). Is there a history of occurrence? Low Not likely to occur in a Has not occurred. © AIRMIC. Has occurred recently. some external influences.3. IRM: 2002 7 .ten years).Threats Estimation Description Indicators High Likely to occur each year Potential of it occurring several times (Probable) or more than 25% chance within the time period (for example - of occurrence.1 Consequences . ALARM. (Remote) ten year period or less than Unlikely to occur.

socio. current management processes. legal requirements. risk should be accepted or treated.This ranks each identified techniques risk so as to give a view of the relative importance. Risk estimated risks against risk criteria which evaluation therefore. 4. describes the dealing with both. to be one year or better than achieved in the short term based on 75% chance of occurrence. (See Appendix. primary control procedures in place and for examples). etc.3. 5.The risk decisions about the significance of risks to criteria may include associated costs and the organisation and whether each specific benefits.These can be specific to This process allows the risk to be mapped upside or downside risk or be capable of to the business area affected. 4. indicates areas where the level of risk control investment might be increased. completed. term or less than 25% Opportunity for which the likelihood of chance of occurrence. Risk Evaluation When the risk analysis process has been economic and environmental factors. 8 A Risk Management Standard . Low Some chance of favourable Possible opportunity which has yet to be (Remote) outcome in the medium fully investigated by management.4 Risk Analysis methods and treatment efforts. Medium Reasonable prospects of Opportunities which may be achievable (Possible) favourable results in one but which require careful management.5 Risk Profile decreased or reapportioned.Opportunities Estimation Description Indicators High Favourable outcome is Clear opportunity which can be relied (Probable) likely to be achieved in on with reasonable certainty.Table 4. The result of the risk analysis process can Accountability helps to ensure that be used to produce a risk profile which ‘ownership’ of the risk is recognised and gives a significance rating to each risk and the appropriate management resource provides a tool for prioritising risk allocated. success is low on the basis of management resources currently being applied. above the plan. year of 25% to 75% chance Opportunities which may arise over and of occurrence.3 Probability of Occurrence . page 14. is used to make the organisation has established. A range of techniques can be used to analyse risks. it is necessary to compare the concerns of stakeholders.

consequences other areas may have on them Increasingly stakeholders look to • have performance indicators which allow organisations to provide evidence of them to monitor the key business and effective management of the organisation’s financial activities. ALARM. IRM: 2002 9 . 6. taken The Board of Directors should: • report systematically and promptly to • know about the most significant risks senior management any perceived new facing the organisation risks or failures of existing control • know the possible effects on shareholder measures value of deviations to expected performance ranges Individuals should: • ensure appropriate levels of awareness • understand their accountability for throughout the organisation individual risks • know how the organisation will manage a • understand how they can enable crisis continuous improvement of risk • know the importance of stakeholder management response confidence in the organisation • understand that risk management and • know how to manage communications risk awareness are a key part of the with the investment community where organisation’s culture applicable • be assured that the risk management • report systematically and promptly to process is working effectively senior management any perceived new • publish a clear risk management policy risks or failures of existing control covering risk management philosophy and measures responsibilities 6. progress towards non-financial performance in such areas as objectives and identify developments community affairs.2 External Reporting Business Units should: A company needs to report to its • be aware of risks which fall into their area stakeholders on a regular basis setting out of responsibility. forecasts employment practices. human rights. health and safety and budgets) and the environment. which require intervention (e.1 Internal Reporting • have systems which communicate Different levels within an organisation need variances in budgets and forecasts at different information from the risk appropriate frequency to allow action to be management process.g. Risk Reporting and Communication 6. the possible impacts these its risk management policies and the may have on other areas and the effectiveness in achieving its objectives. © AIRMIC.

Risk financing is not control measures. to deal with them. but attention by management. or in the system itself. NOTE: In this standard.They will need extends further to. for example.particularly risk management which: management responsibilities for risk • protects the interests of their stakeholders management • ensures that the Board of Directors • the processes used to identify risks and discharges its duties to direct strategy. Any system of risk treatment should The proposed controls need to be provide as a minimum: measured in terms of potential economic • effective and efficient operation of the effect if no action is taken versus the cost organisation of the proposed action(s) and invariably require more detailed information and • effective internal controls assumptions than are immediately • compliance with laws and regulations. 10 A Risk Management Standard . etc. risk financing. risk financing Effectiveness of internal control is the refers to the mechanisms (eg insurance degree to which the risk will either be programmes) for funding the financial eliminated or reduced by the proposed consequences of risk. see page 17). should of risk management should be clearly stated be reported together with the steps taken and be available to the stakeholders. Risk treatment includes as its major by identifying those risks which require element. 7. available. build how they are addressed by the risk value and monitor performance of the management systems organisation • the primary control systems in place to manage significant risks • ensures that management controls are in • the monitoring and review system in place place and are performing adequately Any significant deficiencies uncovered by The arrangements for the formal reporting the system. risk to prioritise risk control actions in terms of avoidance. generally considered to be the provision of Cost effectiveness of internal control relates funds to meet the cost of implementing risk to the cost of implementing the control treatment (as defined by ISO/IEC Guide compared to the risk reduction benefits 73. their potential to benefit the organisation. risk control/mitigation. Risk Treatment Risk treatment is the process of selecting The risk analysis process assists the effective and implementing measures to modify the and efficient operation of the organisation risk. expected.Good corporate governance requires that The formal reporting should address: companies adopt a methodical approach to • the control methods . risk transfer.

not an option. An organisation must safety or environmental incidents. 8. Regular audits of policy and standards compliance should be Any monitoring and review process should carried out and standards performance also determine whether: reviewed to identify opportunities for • the measures adopted resulted in what was improvement. which understand the applicable laws and must may include damage to employee morale implement a system of controls to achieve and the organisation’s reputation. It should be remembered intended that organisations are dynamic and operate in dynamic environments. The loss to be One method of obtaining financial expected if no action is taken must also protection against the impact of risks is be estimated and by comparing the through risk financing which includes results.Firstly. effectiveness is measured. However. • improved knowledge would have helped The monitoring process should provide to reach better decisions and identify assurance that there are appropriate controls in what lessons could be learned for place for the organisation’s activities and that future assessments and management of the procedures are understood and followed. management can decide whether insurance. the cost of implementation has to compliance. ALARM. loss will be uninsurable eg the uninsured Compliance with laws and regulations is costs associated with work-related health. risks © AIRMIC. Changes in the • the procedures adopted and information organisation and the environment in which gathered for undertaking the assessment it operates must be identified and were appropriate appropriate modifications made to systems. This has to be calculated some flexibility where the cost of reducing with some accuracy since it quickly a risk may be totally disproportionate to becomes the baseline against which cost that risk. it should be or not to implement the risk control recognised that some losses or elements of a measures. responses are in place.There is only occasionally be established. IRM: 2002 11 . Monitoring and Review of the Risk Management Process Effective risk management requires a Changes in the organisation and the reporting and review structure to ensure environment in which it operates must be that risks are effectively identified and identified and appropriate changes made to assessed and that appropriate controls and systems.

1 Risk Management Policy The Board should. • the company’s ability to minimise the Attaching to the risk management process probability and impact on the business is an integrated set of tools and techniques • the costs and benefits of the risk and for use in the various stages of the business control activity undertaken process. 9. for • how unacceptable risks should be managed Health and Safety. An organisation’s risk management policy consider. an audit risk analysis committee or such other function that suits • business unit management should ensure the organisation’s way of operating and is that risk management is incorporated at capable of acting as a ‘sponsor’ for risk the conceptual stage of projects as well as management. as a minimum. a reprioritise work in the light of effective non-executive committee. throughout a project 12 A Risk Management Standard . they should introduce risk determining the strategic direction of the management objectives into their business organisation and for creating the • risk management should be a regular environment and the structures for risk management-meeting item to allow management to operate effectively. The Structure and Administration of Risk Management 9. consideration of exposures and to This may be through an executive group.The policy should also set acceptable for the company to bear within out responsibilities for risk management its particular business throughout the organisation. the risk • the effectiveness of the risk management management process requires: process • commitment from the chief executive and • the risk implications of board decisions executive management of the organisation • assignment of responsibilities within the 9.3 Role of the Business Units organisation This includes the following: • allocation of appropriate resources for • the business units have primary training and the development of an responsibility for managing risk on a day- enhanced risk awareness by all to-day basis stakeholders. in evaluating its system of internal should set out its approach to and appetite control: for risk and its approach to risk • the nature and extent of downside risks management. • business unit management is responsible 9. • the likelihood of such risks becoming a Furthermore.To work effectively. it should refer to any legal reality requirements for policy statements eg.2 Role of the Board for promoting risk awareness within their The Board has responsibility for operations.

© AIRMIC.g. Internal Audit • building a risk aware culture within the should ensure that the professional organisation including appropriate requirements for independence and education objectivity are not breached.9. issues within the organisation In addition to other operational functions • developing risk response processes. Internal Audit’s role may include strategy and budget processes. and auditing the risk development projects.5 Role of Internal Audit facilitating the risk management process. The role of Internal Audit is likely to differ Risk management should be embedded from one organisation to another. ALARM. management audit committee. product/service management. It should be some or all of the following: highlighted in induction and all other • focusing the internal audit work on the training and development as well as within significant risks. to a full scale risk in the risk management process management department. those involved in risk including contingency and business management should have their roles in co- continuity programmes ordinating risk management policy/strategy clearly defined. a part time • providing active support and involvement risk manager. they may have.4 Role of the Risk Management management processes across an Function organisation Depending on the size of the organisation • providing assurance on the management the risk management function may range of risk from a single risk champion. as identified by operational processes e.The role of the • facilitating risk identification/assessment Risk Management function should include and educating line staff in risk the following: management and internal control • setting policy and strategy for risk • co-ordinating risk reporting to the board.The same clear definition is • preparing reports on risk for the board also required for those involved in the audit and the stakeholders and review of internal controls and 9. • establishing internal risk policy and 9. In within the organisation through the practice. etc • primary champion of risk management at In determining the most appropriate role strategic and operational level for a particular organisation. IRM: 2002 13 .6 Resources and structures for business units Implementation • designing and reviewing processes for risk The resources required to implement the management organisation’s risk management policy • co-ordinating the various functional should be clearly established at each level of activities which advise on risk management management and within each business unit.

Appendix Risk Identification Techniques . British Standards can be obtained from BSI Customer Services. 389 Chiswick High Road. Opportunities.Weaknesses.Technological) analysis • Real Option Modelling • Decision taking under conditions of risk and uncertainty • Statistical inference • Measures of central tendency and dispersion • PESTLE (Political Economic Social Technical Legal Environmental) Downside risk • Threat analysis • Fault tree analysis • FMEA (Failure Mode & Effect Analysis) On the following pages are extracts from the document PD ISO/IEC Guide 73: 2002 reproduced with the permission of British Standards Institution under licence number 2002SK/0313. Economic. Risk Analysis Methods and examples Techniques .examples • Brainstorming Upside risk • Questionnaires • Market survey • Business studies which look at each • Prospecting business process and describe both the • Test marketing internal processes and external factors • Research and Development which can influence those processes • Business impact analysis • Industry benchmarking • Scenario analysis Both • Risk assessment workshops • Dependency modelling • Incident investigation • SWOT analysis (Strengths. (Tel + 44 (0) 20 8996 9001) 14 A Risk Management Standard . 10. Political. London W4 4AL. Social.Threats) • Auditing and inspection • Event tree analysis • HAZOP (Hazard & Operability Studies) • Business continuity planning • BPEST (Business.

org www. Please contact the individual associations if you wish to purchase more copies of this Risk Management Standard in printed form .com www. EX8 2AY Telephone 01395 223399 Facsimile 01395 223304 Email admin@alarm. The Institute of Risk Management 6 Lloyd’s This publication is available from the above organisations for download from their respective websites free of ALARM The National Forum for Queens Drive. Telephone 020 7709 9808 London EC3N 3AX Facsimile 020 7709 0716 Email enquiries@theIRM.theirm. Insurance and Risk Managers London EC3N 3AX Telephone 020 7480 7610 Facsimile 020 7702 3752 Email The Association of 6 Lloyd’s Avenue. Exmouth Risk Management in the Public Sector Devon.