Risk Perception and Analysis - Desklib

This article discusses the elements of risk management, types of risk, risk matrix and its significance. It also covers the relevance and significance of risk in an organization. The subject and course code are not mentioned.

RISK PERCEPTION AND ANALYSIS
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Risk Perception and Analysis
Part A Elements of Risk Management
Question One
a) Reactive risk management involves the identification of risks and measures to curb or
reduce them way after they have already occurred based on the audit and evaluation
findings after its occurrence. On the hand, proactive risk management involves
identification of a probably risk way before an incident occurs after relevant observations
and measurements have already been obtained (Norrman and Jansson, 2004, p. 434-456).
b) Risk management process has various aspects in a logical manner. First, we start by
assessing the risk faced and this involves identification, measurement, and financing of
the risk (Jorion, 2001).Once that is in order, control measures are adopted and then the
risk portfolio is monitored.
c) The main type of sources of risk in an organization includes systematic and diversifiable
risk, liquidity risk, credit risk, business risk and market risk (Jüttner, Peck, and
Christopher, 2003, 197-210).
d) Risk register which is also known as risk log is a tool used to document risks and the
relevant actions to be taken so as to manage them. Its contents include a brief description
of each risk, risk category, risk rating, the probability of occurrence of a risk and common
mitigation steps in case of occurrence (Cassar, G., 2004, p. 265).
e) This is because general risks arise from external events that the organization has no
control over such as fire whereas the operational risk can be controlled as they arise from

the failure of internal processes, individuals, and scheme or even outside events
(Wipplinger, 2007, p. 397).
f) The achievement of desired outcomes, efficient use of resources in the organization,
presence of transparency and clear accountability in the organization (Tao, 2010, p. 1-4).
g) Risk management system involves the identification, quantification, and management of
risks that a firm is facing. On the other hand, systematic approach to risk management
mainly involves being ready with contingency plans just in case any type of risk faces the
organization at any time(Stewart and Roth, 2001, p. 145).
h) The outcome of events in an organization is always uncertain because various levels of
risk are involved. This, therefore, calls for proper risk governance through a proper risk
management system. The system should be in a position to identify, measure, finance,
control and monitor risk efficiently.
Question Two
Exercise Two
Risk can be of high consequence or low consequence depending on the amount of uncertainty
involved. One has to consider the amount of risk he is able to take and the amount he is
comfortable taking in regards to his financial level. Various types of risk have different levels of
consequences to an organization
Lost time injury is that amount of time lost when an employee is not able to perform his duties
for a day or a shift because of an injury he sustained during work. This puts the organization at a
risk of low labor turn out which might decline the levels of production and hence putting the
organization at a risk of lesser profits or even loss. The amount of lost time injuries that arise

during the reporting period is what levels up to the lost time injury frequency rate. However this
does not create much of a risk as the company could easily maintain a good safety culture, train
the employees on how to keep safe from any types of injuries and also the organization could
conduct a regular hazard assessment system (Blewett, 1994, p. 1-55). Moreover, another
employee could be called upon to perform the duties of the injured employee. This, therefore,
shows that lost time injury frequency rate is not a high consequence value risk to an organization
as measures can be put to control its consequences. As long as the organization has an effective
risk management system, LTIFR will not be much of a problem in the risk measurement and
control.
Exercise Three
Every organization requires a proper risk management committee for its risks governance. A
high-quality risk governance will be full of transparency and clear accountability as well as
efficiency in the use of resources and achievement of desired outcomes.
A competent management team prefers to put the organization in face of lower losses as it is the
main aim of the organization to make profits. It also has to ensure that the cost involved in
identification, initiation, transfer of the risk and enforcement are low as possible as this form the
transaction costs(Stevenson and Hojati, 2007). These include the financial distress costs, the cost
required for issuing external financing, cost of implementing risk management and costs of
ensuring a strong risk profile.
In order for the company to avoid high losses resulting from various types of risk, the
organization has to ensure that proper risk management measures are put in place. The higher the
cost invested in this process of risk governance the higher the probability of the organization

being safe from losses (Stevenson, W.J. and Hojati, M., 2007). These are because a proper
management team will be made which will enable the organization to control and monitor the
risks that it may be facing and therefore reducing the consequence values of those risks.
Operating with lower loss and risk costs and with higher risk control costs also improves the
organization's public image and therefore making it attractive for making investments and they
can also easily get financial support which is really good for the business. Last but not least, the
organization's resources gains much protection.
Exercise Four
Risk can be measured making it have various ways by which it can be controlled. The total cost
of risk greatly depends on this argument. It is considered to be the costs incurred by insurance
companies as premium, administrative costs and indirect costs in the process of performing
safety and risk management programs (Stevenson and Hojati, 2007). All these costs are
controllable as they can be tracked and monitored. Moreover, there are operational tactics that
can be implemented so as to manage and reduce these costs.
The total cost of risk is made up of different constituents the first being insurance premiums. It is
the most easily tracked component of total cost of risk. Another constituent of TCOR is the costs
needed to protect the employees or even customers from injury during operations. These costs
are not easy to track and they include costs for safety equipment, training and warning signs,
e.t.c. However, they could be tracked as part of the total cost of risk for the business internally.
Retained losses is also a constituent of a total cost of risk. This is the amount of money an
organization spends to fix an issue but it is not deducted from there account as they are below the
organization's deductibles. The next element of TCOR is the costs needed to engage firms for

assistance with their risk and insurance issues. An organization could hire an attorney to help
them with this issues. This element is seen as an external risk control cost. Lastly, TCOR is
constituted of productivity loss. This could arise due to losses or even injury and the time and
resources taken to fix them.
Part B Relevance Significance of Risk
Question One
a) Types of risk are the different classes or various forms of risk. The risk is the possibility
or the uncertainty of loss or injury. Market risk being a type of risk is a risk that is related
to the changes in investment market values or any other features that are related to
investment markets. These features could be interest and inflation rates (Diamond and
Rajan, 2001, p. 288). Market risk is divided into the consequences of changes in asset
values, consequences of investment market value change on liabilities and the
consequences of a provider not matching asset and liability cash flow. Market risk is
mainly associated with regular fluctuations observed in the trading price of any particular
shares or securities. That is to mean that it arises because of the rise or fall in the trading
price of listed shares or securities in the stock market.
b) Market risk is a systemic type of risk. It affects the entire market and not only specific
participants of the market. It is an un-diversifiable risk and cannot be controlled through
diversification. It can, however, be compared to diversifiable risks such as business risk
despite being of a different nature through various parameters. These include risk
likelihood, risk consequence and the thresholds to trigger management activities. Risk
likelihood is the probability of the risk occurring and market risk as an un-diversifiable

risk is more likely to occur as there is less control over them. Risk consequences or
impact turns out to be greater due to lack of measures to control them.
c) The market risk could be compared to interest rate risk as they are both systemic risks
and therefore un-diversifiable. They could be compared through various parameters such
as the risk likelihood of occurrence, the intensity of the risk consequences and the
threshold to trigger management activities (Müller and Stoyan, 2002). Market risk has a
higher probability of occurring as compared to interest rate risk which might only occur
in the case whereby there has been a change in monetary policy by the Central Bank. Its
risk consequences are also higher as it affects even the customers. Moreover, it has a
stronger threshold to the risk management or governance committee because of its great
impact.
Question Two
a) The country might have conducted elections which might have resulted in post-
election violence and majorly political instability. This event will result in the
organization facing market risk.
The main event, in this case, is political instability that may be accompanied by chaos.
These would give the organization poor working conditions that would see its
performance going down and therefore most probably incurring losses. The aftermath of
this event will result in a decrease in demand, loss of license of the business due to loss of
control and decrease in supply which all have consequences. A decrease in demand will
be as a result of poor working conditions which might lead the customer into losing
confidence in the organization((Ni, H., Chen and Chen, 2010, p. 1269). Other

competitive companies might also take advantage of the current situation and therefore be
handing them a tough competition to deal with.
The organization may also lose its operating license due to not being able to meet their
dues such as paying taxes and running bankrupt. The organization might also lose its
supply due to the various conditions surrounding it. These would see the downfall of the
organization as the laborers will likely withdraw their labor. The suppliers will also
terminate their contracts due to financial failure and therefore be leaving the company
without resources or raw materials to work with.
b) The risk matrix is also known as impact or probability matrix. It is a software that is
used in capturing identified risks, estimating their impact and the occurrence probability
and then ranking the risks as per this information (Pickering and Cowley, 2010,
p.11). Risk matrix can be used in the critical evaluation of risk and it depends on various
processes to be carried out. The first step towards the evaluation is the planning for the
activity to be conducted. A risk evaluation team with a facilitator is selected and the
ground rules are set for the application in the risk matrix.
Secondly, the team identifies key program requirements or objectives. This will help in
the identification of risks. After that, the team facilitator helps in the process of
identifying program risks and arranging them in an affinity diagram. After that, the team
concurs on grouping titles to be used for every group and then identifies full risk
statements neede in the affinity diagram. These are then entered in the risk entry
worksheet of the risk matrix. The team then assigns various attributes, proper time frame,

impact and chances of occurrence of each risk. After that, risk matrix impact
classifications are set;
 C (Critical); in case the risk event occurs, the program will fail and minimum
acceptable requirements will not be met.
 S (Serious); in case the risk event occurs, the program will encounter a major
increase in costs but the acceptable requirements will be met. However secondary
requirements might not be met.
 Mo (Moderate); in case the risk event occurs, the program will encounter a
moderate increase in costs and minimum requirements will be met. However,
some secondary requirements might not be met.
 Mi (Minor); in case the risk event occurs, the program will encounter minor
increases in cost. The minimum requirement and most of the second requirement
will be met.
 N (Negligible); in case the risk event occurs, it will have no effect on the program
and all the requirements will be met.
The probability of occurrence in the risk matrix is estimated using the relative scale of
occurrence as follows;
 0-10%; very unlikely for the risk to occur
 11-40%; unlikely for the risk to occur
 41-60%; even probability that the risk will occur
 61-90%; likely the risk will occur
 91-100%; very likely that the risk will occur

At this point, the team has all the required information needed to rank the risks. Therefore we
move to the step of ranking program risks. Risk ranking is calculated using the Borda method
which ranks the risks in descending order on the basis of multiple evaluation criteria. After
ranking the risks from the most critical to the least critical, they are then managed by a good risk
management committee. This committee will eliminate some risks in case the requirements
changes, some will need a transfer in the case of inadequate resources to handle them while
others will need mitigation strategies. After managing the risks, the management team will then
manage the action plan as the risk matrix provide an execution plan in the superior mode. This is
used for tracing risk execution plans and in the adjustment rankings of the risk on the basis of
action plan status. The management team should continue monitoring and evaluating risks at a
periodical interval. Through this process, it will be evident whether the level of importance of the
risk has changed or even if new risks that need management have come up. The advanced mode
used in risk matrix is able to support a continuous evaluation process (Goerlandt and Reniers,
2016, P. 67-77).

Part C
a)
Figure 1 Mechanism Analysis Logic Diagram.
The main event is the failure of the RAF ejector seat to function properly. This could have been
because of the faulty pin, case of sabotage or even a case of the faulty parachute. All these events

result in consequences which are as a result of them as it is seen in Figure 1 above (Ball and
Watt, 2013).
ii)
Figure 2. Outcome Analysis Diagram
Questions used in the outcome analysis;
Was the RAF ejector seat checked by a specialist before it was approved for testing in the field?
This is to ascertain whether risk measures were taken into considerations before the test.
The pilot
reported
the event
Pull the
trigger pin
Parachute
did not
open
--------
Death
Death
Death
Failure of RAF
ejector seat
Value
$
Value
$
Value
$

Was the pilot in question prepared and alright psychologically? This is so as to know if he is the
one that messed the seat with intentions of maybe committing suicide.
Did the pilot report the problem early enough? If so, could the technical team do anything to save
the situation?
Is there evidence that the ejector seat was not functioning properly before the plane took off?
This is to determine if the case was reported or had a suspicion but was treated with ignorance.
Were there safety measures put aside in case an event such as that occurred as a precautionary
measure? This is to show if the company was prepared enough for the pilot before doing their
testing (Lankhorst, 2009).

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