The dictionary meaning of the risk is “danger, jeopardy,” means, this word describes itself. So, risk’s complete definition is, to conforms the norms and requirements of insurance plan in such a way that the standard for insurance is fulfilled is named as an insurable risk.
There are a number of different indispensable condition that needs to be fulfilled before insurability’s acceptance. But, where the loss is too high that no insurer would need to pay for it, this danger will have said to be uninsurable. This, the insurable risk is basically of two kinds, Speculative risk, and pure risk. In speculative risk, two chances are involved, loss or gain. While in case of pure risk, there is no chance of profit or gain.
Risk is an event with either a positive or negative outcome. Most people associate risks with negative and opportunity with positive however. In its simplest equation a risk is a mix of the likelihood of the event occurring and the impact of it were to occur. To make it insurable it has to adhere to some of the principles of insurance.
While risks in the business environment are endless and inevitable, they can be categorized into 4 main types:
Strategic Risk: It’s the risk that an enterprise’s strategy becomes less effective and they struggle to reach its goals as a result. It could be due to technological changes, a powerful new competitor entering the market, shifts in customer demand, spikes in the costs of raw materials, or any number of other large-scale changes. Credit Risk: It is the risk enterprises incur by extending credit to customers. It can also refer to their own credit risk with suppliers. An enterprise takes a financial risk when it provides financing of purchases to its customers, due to the possibility that a customer may default on payment. Liquidity Risk: It includes asset liquidity and operational funding liquidity risk. Asset liquidity refers to the relative ease with which an enterprise can convert its assets into cash should there be a sudden, substantial need for additional cash flow. Operational funding liquidity is a reference to daily cash flow. Operational Risk: It refers to the various risks that can arise from an enterprise’s ordinary business activities. The operational risk category includes lawsuits, fraud risk, personnel problems, and business model risk. Enterprises need to be vigilant and proactive in identifying and mitigating various risks.
Some tools for identifying risks are:
Review your business plan thoroughly and try to get an expert opinion. Ensure that you’re getting opinions from various departments and people. Do not approach it with a tunnel view. Conduct proper PEST, SWOT and situation analysis. Conduct Critical Market Research Analysis. It refers to evaluating market risk and competitor risk.