Principles of Risk Management and Risk Measurement

Understanding Risk Management Principles

Risk management is the identification, assessment and economic control of those risks that may endanger the assets of an organisation.
Risk Identification: It is the first step in the risk management process and involves identifying potential risks that can impact an organisation.
Risk identification can be achieved through methods such as checklists, assumptions analysis, risk workshops, and expert interviews.
Risk Assessment: Overall potential impact of risks identified is evaluated in this step. It can be done through qualitative or quantitative assessment methods.
Risk Control: This involves deciding on the best method to mitigate potential risks to the organisation. These methods can be risk avoidance, reduction, sharing, or acceptance.
The decision on the approach towards risk management planning is typically based on the risk reward trade-off, resources available and the organisational risk policy.

Risk Measurement Principles

Risk Measurement is the process of quantifying the potential for losses in an investment or business activity.
It helps in determining the extent of uncertainty or potential severity of a loss.
Risk can be measured by looking at standard deviation (variability around the mean), value at risk (VaR), expected shortfall (ES), or Entropic value.
Probability Distribution: This provides estimates of the likelihood of a particular outcome, which can then be used to measure risk.
Sensitivity Analysis: Evaluating how changes in a single input impacts the output, in order to determine risks attached to a specific input.
Scenario Analysis: Involves determining potential outcomes of different scenarios. This is particularly applicable to the insurance industry to assess the potential impact of large scale events like a natural disaster.
Tail Risk: Refers to extreme events that have a small probability but a large potential impact.

Remember to always link your understanding of Risk Management and Measurement Principles to real-life scenarios and case studies. Analyse how companies in various sectors might use these principles in different ways.