An overview of risk, uncertainty and risk management .

2. Its an aid to decision making , ie an effective risk management system is developed to the level where it aids decision making i.e reporting and hedging and influencing the decision making process before decisions are made.

3. It’s an aid for pricing decisions. The price of a commodity should include a premium depending on risk of the client. (risk weighted premium).Knowledge of risk enables appropriate prices to be charged to customers

4. A mispricing attracts high risk customers whom the lower risk customers subsidies. Mispricing overcharges the lower risk clients whom competitors can attract with lower prices to the detriment of the bank.

5. Risk management can also assist in the development of competitive advantage .Controlling current and future costs is also a contribution to income both present and future.Key Elements of Risk Management<br />The key elements of RM should be comprehensive, proven in practice to be effective and likely to stand test of time, they include’<br />-An active and effective board of directors and senior management oversight.<br />-Framework for managing risk - there should be a framework for managing risk that is effective, comprehensive and consistent<br />-Integration of risk management -<br />-Business line accountability<br />-Risk evaluation/measurement –all risks should be qualitatively evaluated on recurring basis.<br />-Independent review – Risk assessments should be validated by independent review functions with authority and expertise.<br />-Contingent planning – RM policies and processes to address potential crises and unusual circumstances should be in places and tested as appropriate.<br />Life Cycle of Risk Management<br />The life cycle of the risk management process starts from identification of risk, through measurement of risk, risk planning, monitoring and up to control and communication of risk.<br />Identification- involves searching for location of risk before it becomes a problem. Risks changes overtime and tools such as internal audits in place should be able detect such risk.<br />Measurement- Risk data is transformed into decision making information. Risk measurement encompasses evaluation of impact of risk, probability of occurrence, classification of risk and prioritization of risk.<br />Planning – involves the translation of risk information into decision and mitigating actions as well as implementation of those actions.<br />Monitoring – monitoring risk indicators as well as monitoring risk actions <br />Control – correction of deviation from the risk mitigation plans .Risk control relies not just on the system of controls being in place but also on the system controls being applied properly and regularly checked by management.<br />Communication – provision of information and feedback to internal and external operators, a management and the board on the risk activities. Communications happens throughout all the functions/stages of risk management<br />