Do You Know Your Risk Profile?

There is key information to be learned from your business’ risk profile to help you make informed risk management decisions. Therefore, it is important to get it right. There are many factors that influence the conclusions drawn from this measurement to be considered before you should take action on the results.

What is Your Risk Profile?

Your risk profile should provide a point in time, aggregated view of your business’ risk management status. The basic premise of sound risk management is assessing the likelihood and impact of your risks, judging whether they fall within your risk appetite, and deciding if corrective action is needed.

If several risks are outside of your appetite, you are likely running a “high” profile. Conversely, if very few risks are assessed to be outside of your appetite, you probably have a “low” profile. There is no science for what determines a “high” or “low” risk profile. But, there are some factors that you can consider to help draw your conclusion.

Factors to Consider When Determining Your Risk Profile

There are several aspects than can influence the conclusions drawn from measuring your risk profile. Each should be considered carefully before you take actions to change your profile.

Widespread or Targeted Risk Management Areas?

Corrective action taken to change your risk profile might vary depending on whether you need to fix a targeted risk category.

You may recall that your risk assessments can be grouped into high-level risk categories such as operational, financial, or strategic risks. The hierarchal grouping of your risks into categories is your risk taxonomy.

It is important to determine whether the risks assessed to be outside of your appetite are within one or many risk categories. This can indicate if your risk profile assessment is based on a select few risk categories or on more widely spread risks. And therefore, aid in the determination of whether you have a “high” or “low” profile.

Are Corrective Actions Being Taken?

Recognizing that you have risks outside of your appetite and not taking corrective action to bring these risks within appetite can lead you to determine that you have a “high” profile. Moreover, if the corrective actions being taken require a long lead time to implement this could also signal a “high” profile. This is because these risks will be outside of appetite for some time, potentially exposing you to higher-than-expected materialized risks.

How Many Risks Have Materialized?

It is important to also consider how many risks have materialized, both in terms of number and aggregated loss amounts. Understand whether the losses that materialized were within expectations in aggregate and by risk category type. Use your risk likelihood and impact matrix to help you determine your expected losses for each risk type and collectively.

Perhaps, your concerns over your risk profile can be alleviated by the realization that risks are not materializing as expected. For this reason, if you are not already required to do so, you should maintain a risk event register to log, track, and analyze your risk events. This could also be a helpful tool to signal whether your risk management processes are effective.

How Accurate Is Your Risk Profile Assessment?

It is important to put in place indicators that measure the effectiveness of your risk management processes. Prior to measuring your risk profile, you would have established your risk management framework for how you manage your risks. This framework should also be supported by guiding principles and procedures. Collectively, these set the tone for how risks should be identified, assessed, monitored, and managed in your organization.

If these guidelines are not being followed as expected or are ineffective, it can call in to question how much you can rely on your risk profile conclusions. For example, if you established within your organization that risks should be assessed twice a year but in fact are only being assessed once a year, you may be basing your risk profile assessment on dated information.

How Often Should You Measure Your Risk Profile?

You can equate your risk profile assessment to determining the risk management pulse for your organization. Consider the size and complexity of your organization to help you determine how often you should measure your risk profile. For some organizations, an annual pulse check is sufficient but for others more frequent measurements may be warranted.

You may not need to conduct a full measurement each time. Perhaps, the frequency with which you measure your risk profile can be based on your risk category type, such as operational, financial, or strategic risks. A good barometer is to assess your risk profile as often as you need to or are able to make risk management decisions.

Ultimately, the purpose of measuring your risk profile is to help you make informed risk management decisions for your business. So, you decide what measurement frequency makes the most sense for your organization.