Definition of Risk
Risk implies future uncertainty about deviate from expected earnings or expected outcome. Risk measures the uncertainty that investors are willing to take to achieve a return on investment. Since a probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.
In the aspects of finance, risk is the probability that an actual return on an investment will be lower than the expected return. Financial risk is divided into the few categories that are basic risk, capital risk, country risk, default risk, delivery risk, economic risk, exchange rate risk, interest rate risk, liquidity risk, operations risk, payment system risk, political risk, refinancing risk, reinvestment risk, settlement risk, sovereign risk, and underwriting risk.
In the aspects of food industry, there may be a certain level of negative impact due to a certain hazard in the food. In the aspects of insurance, risk is a situation in which the probability of a variable such as the burning of a building is known. In the aspects of securities trading, risk is the probability of loss or decline in value. Trading risks fall into two broad categories. First, systemic risk. It affects all securities in the same category and is related to the overall capital market system and therefore cannot be eliminated through diversification. It is also known as market risk. Second, non-systematic risk. It refers to any risk that is not related to the market or is not a systemic risk. It is also known as non-market risk, additional market risk or non-systematic risk.
Definition of risk management
Risk management is the process of identifying any potential threats that may occur during the investment process and doing everything possible to mitigate or eliminate dangers. There are many different types of risks in business, and even more risks in the investment field. Some of them include competition, economic factors and market volatility. In relation to the risk of the investment itself, the entity can also consider its location in terms of capital. For example, if a company has RM10,000 in assets, a risk management analysis may make it unwise for the organization to invest RM5,000 in highly volatile stocks.
Businesses typically assess risk in their day-to-day operations and on a regular basis before making any investment decisions. Companies will often review risk analysis to determine which type of securities they want to buy or the companies they are willing to invest in. When companies consider future product lines or factory expansions and they want to evaluate them, they want to assess the total danger of that investment before pulling the trigger.
Risk Management Process
Identifying potential losses
The first step in the risk management process is usually informal and can be performed in various ways, depending on the organization and the project team. It means that the identification of risks relies mostly on past experience that should be used in upcoming projects. In order to find the potential risks, an allocation needs to be done. This can be decided and arranged by the organization. In this case, no method is better than another, since the only purpose is to establish the possible risks in a project.
Risks and other threats can be hard to eliminate, but when they have been identified, it is easier to take actions and have control over them. If the causes of the risks have been identified and allocated before any problems occur, the risk management will be more effective. Risk management is not only solving problems in advance, but also being prepared for potential problems that can occur unexpectedly. Handling potential threats is not only a way to minimize losses within the project, but also a way to transfer risks into opportunities, which can lead to economical profitability, environmental and other advantages.
Measuring potential losses
Risk analysis is the second stage in the risk management process where collected data about the potential risk are analyzed. Risk analysis can be described as short listing risks with the highest impact on the project, out of all threats mentioned in the identification phase. In the analysis of the identified risk, there are two categories of methods which are qualitative and quantitative methods have been developed. The qualitative methods are the most applicable when risks can be placed somewhere on a descriptive scale from high to low level. The quantitative methods are used to determine the probability and impact of the risks identified and are based on numeric estimations. Companies tend to use a qualitative approach since it is more convenient to describe the risks than to quantify them. In addition, there is also one approach called semi-quantitative analysis, which combines numerical values from quantitative analysis and description of risk factors, the qualitative method.
Within the quantitative and qualitative categories, a number of methods which use different assumptions can be found, and it may be problematic to choose an appropriate risk assessment model for a specific project. The methods should be chosen depending on the type of risk, project scope as well as on the specific method’s requirements and criteria. Regardless of the method chosen, the desired outcome of such assessment should be reliable. The selection of the right technique often depends on past experience, expertise, and nowadays it also depends on the available computer software.
Selecting the risk management technique
This third step of the risk management process indicates what action should be taken towards the identified risks and threats. The response strategy and approach chosen depend on the kind of risks concerned. Other requirements are that the risk needs to have a supervisor to monitor the development of the response. The lower impact the risk has, the better it can be managed. Most common strategies for risk response are avoidance, reduction, transfer and retention. Beyond those types of responses, sometimes it is difficult to take a decision based on too little information. This may be avoided by waiting until the appropriate information is available in order to deal with the risk. This way of acting is called “delay the decision” but this approach is not appropriate in all situations, especially when handling critical risks.
Avoidance
If the risk is classified as bringing negative consequences to the whole project, it is of importance to review the project’s aim. In other words, if the risk has significant impact on the project, the best solution is to avoid it by changing the scope of the project or, worst scenario, cancel it. There are many potential risks that a project can be exposed to, and which can impact its success. The avoidance means that by looking at alternatives in the project, many risks can be eliminated. If major changes are required in the project in order to avoid risks, applying known and well developed strategies instead of new ones, even if the new ones may appear to be more cost efficient. In this way, the risks can be avoided and work can proceed smoothly because strategy is less stressful to the users.
Reduction
By having an overview over the whole project, it is easy to identify problems which are causing damage. In order to reduce the level of risk, the exposed areas should be changed. This is a way of minimizing the potential risks by mitigating their likelihood. One way to reduce risks in a project is to add expenditures that can provide benefits in the long term. Some projects invest in guarantees or hire experts to manage high risk activities. Those experts may find solutions that the project team has not considered. Those risks which should be reduced can also be shared with parties that have more appropriate resources and knowledge about the consequences. Sharing can also be an alternative, by cooperating with other parties. In this way, one project team can take advantage of another’s resources and experience.
Transfer
If a risk can be managed by another actor who has a greater capability or capacity, the best option is to transfer it. The risk should be transferred to those who know how to manage it. The actors that the risks can be transferred to are, for example, the client, contractor, subcontractor, designer etc., depending on the risk’s character. As a result this could lead to higher costs and additional work, usually called risk premium. It must be recognized that the risk is not eliminated, it is only transferred to the party that is best able to manage it.
Retention
When a risk cannot be transferred or avoided, the best solution is to retain the risk. In this case the risk must be controlled, in order to minimize the impact of its occurrence. Retention can also be an option when other solutions are uneconomical.
Implementing and monitoring the risk management program
This final step of risk management process is vital since all information about the identified risks is collected and monitored. The continuous supervision over the risk management process helps to discover new risks, keep track of identified risks and eliminate past risks from the risk assessment and project. It also states that the assumptions for monitoring and controlling are to supervise the status of the risks and take corrective actions if needed. The tools and techniques used to risk monitor and control can be risk reassessment which is identification of new potential risks and constantly repeated process throughout the whole project. Second, monitoring of the overall project status to see whether there are any changes in the project that can cause new possible risks. Third, status meetings which is the discussion with risk’s owner, share experience and helping managing the risks. Fourth, risk register updates.
Summarization of Articles
Article 1: Construction site accidents rising (appendix 1)
This article is reported by Tan Sri Lee Lam Thye on January 14, 2018. This article reported about accidents in construction site and as far as safety is concerned. It reported that the latest fatal incident, where a Bangladeshi worker died on the spot when the incomplete cement flooring beneath him gave way at the Tenaga Nasional Bhd substation, next to the Cochrane Mass Rapid Transit station in Kuala Lumpur. It also reported that contractors did not do well on the part of safety and healthy. They did not implement OSH practices, including adopting HIRARC, which is the concept of hazard identification, risk assessment and risk control well. From the news also reported the statistics that indicate the accidents in the construction industry in several years.
Article 2: Fire losses during construction can be alarming (appendix 2)
This article is reported by Eric Michot on September 15, 2016. This article reported that construction projects represent a significant risk for insurers. From the early stages of a project to the final phase when the largest concentration of values are on the site, losses from fire can add up for insurers. The article discussed a few examples of important buildings in France that faced with fire losses in recent years.
Risk Management Process for Article 1
Identifying potential losses
Human resources loss exposures: This is the largest loss exposures for the case since there is a Bangladeshi worker died on the spot. The death of the key employees during construction will reduce the manpower capacity and extend the duration for the project. In addition, the contractor is responsible for the death of the worker because they do not implement the safety and health practices well at the workplace.
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Intangible property loss exposures: The accident happened will bring damage to the contractors’ public image. It is because people will observe that the company is not careful in the part of safety and health practices, and fewer people are willing to work in this company due to the lack of security.
Measuring potential losses
Loss frequency: From the statistics of Social Security Organization, it indicates that 7,338 accidents were reported in the construction industry in 2016, compared with 4,330 cases in 2011, an increase of 69.47%. In addition, based on the Department of Occupational Safety and Health (DOSH) records, 106 deaths were reported in the construction industry in 2016 compared with 88 deaths in 2015. If the unreported cases are took into account, the figures would be higher. Therefore, the loss frequency in the aspects of human resources loss exposures is expected to be very high if these accidents continue to occur.
Loss severity: The loss severity of the accident is very high because it can lead to death of workers. Life is precious and irreplaceable, and the loss of life is the most serious thing.
Selecting the risk management technique
Avoidance: To avoid the latest fatal incident stated in the article, contractor should always ensure that every parts of the construction work are doing completely and carefully to reduce the risks that they may face afterward.
Reduction: The contractor should implement Occupational Safety and Health practices, including the use of HIRARC, which is the concept of hazard identification, risk assessment and risk control. This will help workers and their supervisors to identify hazards and risks, and find ways to avoid them. This is a way to minimize potential risks by reducing their likelihood. In addition, the safety checklists should be done before the construction work starts. Eye and face protection, hand protection, foot protection, and head protection should be given completely to the workers. According to the case, foot protection and head protection is extremely important. The victim was on the third floor at the center of the unfinished flooring, and fell through the flooring and landed on the first floor while he was layering and setting concrete cement. He was buried in tons of construction scaffolding, wet cement and metal reinforced beams. Therefore, foot protection is used for slip-resistant. For head protection, it can reduce the damage to the head after the victim falls from a height. The most critical part of a person is the head, so as long as the head is insured, that person may still be able to survive.
Insurance: The contractor should purchase insurance for their workers since the severity of loss is very high. According to the case, if the contractor has purchase insurance for the workers, the insurance company will help the contractor to compensate the loss of the dead worker. Therefore, the contractor can also reduce the compensation required.
Implementing and monitoring the risk management program
After the identified risks is collected and analyzed, and the techniques are selected, the contractor can implement and monitor the risk management program. The monitoring of the risk management program should be continuously proceed so that the company can keep track of identified risks and discover new risks if any. In addition, new techniques may be discovered and can be used in the risk management program. Besides, the internal members of the contractor company should always discuss on how to manage the risks, so that the risks level can be reduced until very minimum and provide maximum security to all workers.
Risk Management Process for Article 2
Identifying potential losses
Property loss exposures: The fire accident during construction will lead to huge losses in the part of building, furniture, and electric appliances. The less serious situation may involve only a small part. However, the most worrying situation is that the whole building has been burned. The contractor needs to recover all of those losses after the accidents. They are involved a high amount of money to do so.
Business income loss exposures: Since there are a lot of losses occurred, therefore the contractor will pay a lot on the expenses to cover the losses. And because of that, the profits received by the contractor will be reduced at the end of the project.
Human resources loss exposures: The death of key employees is less likely to happen in a fire accident. It is because sometimes the fire happens when no one is there, which may be caused by a fire on the circuit. However, fire can also occur during construction, which may be caused by factors such as employee negligence or inadequate safety facilities. Of course, if workers escape in time, the risk of death will be very low.
Measuring potential losses
Loss frequency: As can be seen from the article, there were four fire accidents in France, and this is only part of it. Fire accidents during construction are very common situation nowadays. Therefore, the probability of happening fire accidents is high. As for the loss frequency in the aspects of human resources losses, the frequency is low because fire accident may happen when workers are not working. However, in the aspects of property losses, the loss frequency is between high and low. As mentioned above, the biggest damage can be the entire building burns. The slightest accident may be just a small part burned down.
Loss severity: The loss severity of the fire accident is very high in the aspects of property losses. It is because it costs a huge amount of money the cover the losses. The most worrying thing is the contractor has not have enough money to cover the losses or restart the whole project. If there is no insurance company's help, the company's losses will be very heavy. Therefore, the loss severity is very high and can affect the contractor’s operation.
Selecting the risk management technique
Avoidance: A large part of the recent construction fires were caused by arson. Therefore, on-site safety and control measures can provide valuable protection. These include installation of monitoring systems, contracted security with active documented rounds to ensure alertness, signage, fences and adequate lighting, and rapid removal of refuse and scrap materials that may be used to start a fire. In addition, from the very beginning of the project, ensure that there are enough fire extinguishers on site and the sprinkler system is installed and put into use as soon as possible.
Reduction: The contractor should develop a detailed emergency response plan outlining the sequence of all actions to be taken when a fire occurs. The plan should be re-evaluated to ensure its feasibility and effectiveness. In addition, the plan should be physically rehearsed and tested to ensure that everyone understands their respective roles and responsibilities. At the same time, accidental fires continue to be an issue as well. To reduce the risks of unintentional fires, designated smoking areas, establish and implement a strict thermal permit system. This information needs to be communicated with all contractors and workers on site and reinforced in safety discussion and training.
Insurance: The contractor should purchase insurance for themselves since the severity of loss is very high. According to the case, if the contractor has purchase insurance for the workers, the insurance company will help the contractor to cover the losses of the property.
Conclusion
Because of fewer know-how and awareness among the people, the method of risk management are sparingly applied. When dealing with project risks, the tracking record is also small, which affects the project objectives. This paper details the risk management process of published literature. Risk management can better understand the nature of risk by categorizing risks. There are several ways to categorize risks to achieve different goals. For some people, in a construction project, risks can be broadly divided into external and internal risks, while other risks can be classified into more detailed categories. These categories depend on the condition of the project and the surrounding environment.
All methods of assessment are important for decision making, and all decisions recommend considering the risks of alternatives. In some methods, risk is measured better or more specifically than other methods, but they all have in common: high and medium levels of experience, time resources, and detailed data are required. Even though the quantitative approach uses more resources than the qualitative approach, they are also more complex.
The current state of the construction industry risk management methods in developing countries in the world generally attempts to avoid or transfer these risks, which leads to the risk of passive and informal transactions in risk management practices in a large number of industries. However, current awareness of risk management is continuing and there is a strong desire to learn from past mistakes.
The research work is considered a small part of a comprehensive research project aimed at reassessing the construction risk management process and promoting the elimination of existing gaps between the theory and practice of building risk in developing countries around the world.
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