What Does Risk Assessment Mean?

A risk assessment is a blanket term used in many industries to describe an evaluation process that determines the likelihood of potential problems negatively impacting the company. The actual meaning of risk assessment depends on the industry in question.

Investment Risk Assessments

In the investment world, risk assessments must be performed to identify if an investment is sound and what precautionary steps may be taken to mitigate problems. There is always a certain amount of expected risk with investments at both the individual and institutional levels. This especially applies to non-guaranteed investments like bonds, stocks and mutual funds.

Investment risk managers use standard tools and specific ratios to create customized risk profiles for each proposal that determines what rate of return is needed to make the investment a success. Investment risk professionals use formal assessment techniques and measurements like the conditional value at risk (cVaR), which is used by portfolio managers, and the loan-to-value ratio, which is used by mortgage lenders.

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Credit Risk Assessments

Credit risk professionals and institutional lenders use various credit analysis tools to analyze a potential client’s financial data to determine whether to lend money and at what interest rate. This includes personal loans to buy a new car, commercial loans to start up a business, permanent lines of credit for existing companies and residential and commercial mortgages. A commercial credit score (CCS) is used by financial institutions to predict whether the target company will delinquently pay its bills, seek legal relief from creditors or close its doors without paying its debts.

A credit score of one means that the company presents only 10 percent of risk and maintains a commercial credit score of at least 580 points. On the other hand, banks use personal credit scores when it comes to mortgages and major loans. Lenders will execute a risk assessment through checking the applicant’s credit score. These individual credit checks utilize FICO scores that are available free to consumers through the federally approved Annual Credit Report website here.

Workplace Risk Assessments

OSHA requires that companies with potentially dangerous tasks or hostile work environments perform risk assessments to identify and mitigate hazards. From an industrial safety perspective, risk assessments analyze the risks associated with specific hazards in order to determine appropriate ways to control or eliminate the problem. Safety risk assessments consider processes, equipment, people and environments when it comes to employee safety.

For example, production workers are at risk of being struck by moving objects, such as forklifts, or being injured by work processes, such as machines. To minimize the risk of being struck by a forklift, managers will train and certify drivers, establish clear walkways and terminate drivers who ignore safety guidelines. On the other hand, production workers will be kept safe by providing them with personal protective equipment (PPE), engineering solutions that manage machine dangers and training on how to properly handle materials.

When it comes to tangible safety, risk assessments are important because they create awareness of hazards, prevent injuries and maintain employee well-being. Intangible risks, such as financial loss and business failure, can be managed through risk assessments that establish internal controls and procedures.

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