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Taking Action: Optimizing Business Risk Response

Regions Bank's article "Optimizing Business Risk Response" features commentary from Joe Underwood of Albert Risk. The article discusses the concept of risk appetite and the different categories of risk response.

Excerpts from the article:

Risk is inherent in every business: Without risk, there is no reward. But that doesn’t mean you should simply accept every risk that comes along.

Quite the opposite: By systematically cataloging the risks your company faces in every area, you can establish a plan to respond to each according to strategic priorities. The process begins by first identifying your company’s appetite for risk.

“Your risk appetite is a broad statement about the overall types and levels of risk that the organization wishes to assume in pursuit of its strategic objectives,” says Joe Underwood, principal at Albert Risk Management Consulting. “It’s closely tied to your mission statement.” Risk appetite is a descriptive benchmark against which you can establish a tolerance level for each specific risk.

After you’ve identified risks, you need a process to establish priorities, usually by assessing impact and likelihood. “I feel it is critical for an early-stage risk management program to demonstrate value quickly, so I also like to include the practical opportunity for improvement within the assessment,” Underwood says. “Start with the low-hanging fruit: What risks can be addressed quickly and inexpensively while maximizing results?”

But address how? There are four possible ways to respond to risk: accept, because it falls within your tolerance level; avoid, because the risk reward aspect is not favorable; reduce, because there are practical means to do so, or transfer to another party when economically feasible. “For each risk, various and often multiple responses may apply,” says Underwood, adding, “There are no free lunches—each has its advantages and disadvantages.”

Risk management is an ongoing process, and the result of each assessment should be carefully documented—including who is responsible for monitoring, reporting, and responding to each risk. The key is communication and organization-wide awareness. “Senior leaders need to develop eyes and ears on the ground,” Underwood says. “They need their people thinking and talking about risk in conjunction with reward, as well as reliable communications to parties who are in a position to take appropriate action when warranted.”

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