Third Party risk management is a critical part of a company’s operational strategy. It prepares businesses to make sure that they can anticipate, identify, and mitigate threats to their success.
Whether in finance, healthcare, construction, or other industries, a solid risk management framework allows businesses to better protect themselves by minimizing the impact of potential risks.
In this blog, we’re breaking risk down in simple terms, exploring the five key principles, steps, components, and measures of risk management. Follow along to learn more – or jump to the bottom if you want to explore our certificate of insurance solutions.
What are the 5 Principles of Risk Management?
What are the key elements of third party risk management? Let’s start by breaking down the five principles of risk management, or the core pieces for building the mindset around a strategy.
1. Identification
The first principle of risk management is identifying all risks that could affect an organization. Assess both internal and external factors to pinpoint possible risks. Some realms to consider include:
- Compliance risks
- Financial risks
- Reputational risks
- Cybersecurity risks
- Other weaknesses in operations
2. Assessment
Once risks are identified, they need to be assessed to determine their likelihood of happening and the potential impact they’d have on the organization. Businesses should evaluate both the qualitative and quantitative aspects of each risk. This will help teams determine which risks require the most attention and prioritization based on their severity.
3. Treatment
After assessing the risks, the next step is to decide how to address them. Risk treatment can include a variety of strategies, such as transferring risk through insurance, mitigating it through internal policies, or accepting the risk if it poses only a minor threat or impact. The “right” strategy will largely depend on your organization’s resources and risk tolerance.
4. Monitoring and Reviewing
Monitoring risks and the effectiveness of your chosen mitigation strategies is essential for ensuring that they remain manageable. Changes in the market, regulations, or even internal operations may change the way certain risks need to be handled.
5. Communication and Consultation
Effective risk management requires open lines of communication between an organization and its partners. Keep your stakeholders, including your employees, managers, and external partners, involved and in the loop to ensure that nothing in this process slips through the cracks.
What are the 5 Steps of Risk Management?
Now that we’ve covered the fundamentals let’s get specific and break down the five steps involved in a robust risk management process.
1. Identify Hazards
First, identify the risks that a third party might open up your business to, including operational failures, cybersecurity threats, regulatory risks, and more. Some businesses use techniques like the SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) to grasp a range of possible threats.
2. Assess and Prioritize the Risks
Next, the risks must be evaluated in terms of probability and severity. In this step, businesses determine the likelihood of a risk occurring and the level of damage it could bring them if it were to happen.
3. Develop Control Measures
Risk control ultimately leads to putting strategies in place to prevent or minimize the impact of the identified risks. Measures can include a wide range of things, like changing procedures, implementing new technologies, or putting safeguards like a COI management process in place to protect assets.
4. Implement Controls
Once control measures are identified, it’s time to implement them across an organization. Create a plan for executing risk mitigation strategies. This could involve things like training employees, updating systems, allocating resources to affected departments, and clear documentation around new policies.
5. Supervise, Monitor, and Review
The final step is an ongoing one, which is to continuously supervise the measures that have been put in place. Regular reviews are essential to ensure that the implemented strategies are effective and to identify any new risks that could arise.
What are the Five Measures of Risk?
Finally, here are five ways that companies can consider measuring and evaluating potential threats.
1. Likelihood and Probability
It is crucial for businesses to measure (to the best of their ability) the probability of a risk occurring. Estimating how likely it is for risks to happen helps you decide which ones need immediate attention vs. which can be monitored more passively over time.
2. Impact Assessment
This measures the potential consequences of a risk if it were to occur. Risk managers use impact assessments to prioritize which risks need more dedicated mitigation strategies.
3. Cost-Benefit Analysis
A cost-benefit analysis is a process used to weigh the benefits of an action versus the costs to a business. The same applies to risk management, helping businesses decide whether it’s worth investing in mitigation strategies for specific risks. If the cost of managing the risk outweighs the potential loss, you might decide to just accept it.
4. Risk Tolerance Levels
Every business will have different amounts of risk that they’re willing to accept when it comes to new partners based on their resources, industry, and operational strategy. Defining risk tolerance can help your company prioritize risk mitigation tactics and strategically enter partnerships.
5. Risk Mitigation Strategies
Finally, whether via new policies or contingency plans, craft and implement mitigation strategies to ensure that your organization is well-prepared to handle any risks that you’ve identified that may come your way.
We’ll Give You More Than Five Reasons to Give Us a Call!
Risk management is a complex process that requires careful attention to the unique risks that your business might face.
To safeguard your organization’s future, consider investing in a comprehensive risk management solution like myCOI. Book a demo today to learn how our software can help you streamline your risk management and protect your assets. Contact myCOI today!