The Risk Management Process

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The Risk Management Process
Hamrd (or Risk) Identification
One of the most critical functions of risk management

 is probably the
identification process. A failure to recognize the existence of one or more
potential events can result in financial disaster. The importance of being able to
anticipate the existence of the problem before it materializes is recognized by
everyone but unfortunately there is no scientific method or systemic approach to
the identification process. In the extreme case, the very existence of the risk may
be unknown. In the past, exposure identification has largely been exercised in
terms of those exposures that are insurable and in terms of the company past
experience. The most difficult part of the identification process is that it requires
that the manager be clairvoyant and continually asks "what if" questions.
Williams and Heins (1989) define risk identification as "the process by
which a business systematically and continuously identifies property. liability
and personnel exposures as soon as or before they emerge." 8
Several approaches to the identification process have been suggested am
most of them consist of an evaluation of all the operational characteristics of the
firm. Checklists of potential risks have been developed by risk management
associations, risk management consulting firms or insurance companies and they
are mainly based on a questionnaire approach. On-site inspections are usually an
indispensable complement to a questionnaire.
Other approaches have been suggested based on flow-chart methods,
financial-statement methods or contracts analysis.9 Professor John O'Connell
has identified four components in a systematic approach to identifying the
exposures of a particular firm: (1) customers, (2) suppliers, (3) competitors and
(4) regulators.! 0 The greatest difficulties for the identification function have
probably occurred in the recent past in the area of legal liabilities.
Job or position analysis is another area for risk identification. In dealing
with job description, manpower management enumerates the duties of an
employee, analyzes how the functions are performed and should also identifY
potential dangers to the employee or the organization. The Taylorism focused
attention on the man and machine relations. Frederick Taylor's emphasis upon
the physical environment of the job points out a natural area of interest to risk
identification.

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