Risk Mapping

Risk mapping visualise specific risks a company faces. It assists companies in identifying and prioritising their business risks.

What is it?

After a firm establishes its risk appetite, it should assemble an inventory of all known risks. This process is called risk mapping, and it is the next logical step in the risk management process. This robust approach systematically considers any risk with a known (or potential) cash impact on the firm.

Every type of risk (i.e., market risk, credit risk, liquidity risk, operational risk, legal and regulatory risk, business and strategic risk, and reputation risk) is considered.

Example of Risk Mapping

Consider an example of a firm with a known commodity risk exposure in its manufacturing process. They may be exposed to the price of steel. Futures contracts are readily available for copper, but they will have to know precisely where, when and how much steel must be hedged effectively.

Why should your organization be using risk maps? 

Building a risk map brings valuable benefits. You will have a thorough understanding of your risk environment and how individual risks compare to one another. You can use this to strategically prioritize your risks and determine where to use your limited resources.

A risk map is built by plotting the frequency of a risk on the y-axis of the chart and the severity on the x-axis. Frequency is how likely the risk is or how often you think it will occur; severity is how much of an impact it would have if it did occur. The higher a risk ranks for these qualities, the more threatening it is to your organization.

The most severe and frequent risks, your primary risks, are critical and would hinder your ability to conduct business. Risks that are severe but unlikely, your “detect and monitor” (D&M) risks, are those that need to be watched but don’t require heavy mitigation strategies. Risks that are highly likely but insignificant, your monitor risks, will not impact your ability to continue operations. Finally, the risks that are low in both frequency and severity, your low control risks, can be revisited on a yearly basis to ensure the risk remains low.

Risk maps are a valuable tool as they allow you to:

• Understand the risk environment
• Risk management begins with building a list of all risks your organization faces. Depending on your industry, this number could range from a handful to hundreds.
• Risk mapping is beneficial because it requires you to assess each risk and its causes and consequences individually. It also allows you to look at your risk environment as a whole and understand how frequencies and severities compare. 

Risk mapping is used to assist in identifying, prioritizing, and quantifying (at a macro level) risks to an organization. This representation often takes the form of a two-dimensional grid with frequency (or likelihood of occurrence) on one axis and severity (or degree of financial impact) on the other axis; the risks that fall in the high-frequency/high-severity quadrant are given priority risk management attention.

Finally, a risk map is a visual that anyone in your organization can use to see the big picture of risks most prominent in your industry or workplace.

Prioritize mitigation strategies

With limited resources, it’s important to be strategic about mitigation techniques. Risk mapping allows you to determine what steps to take first: implement prevention tactics for the most frequent and severe risks before moving onto others.

This prioritization method ensures that you address the risks that have the most potential to cause harm to your organization.

Allocate limited resources

Whether your organization consists of 2 employees or 2000, risk managers have limited resources. Risk mapping allows you to use them to prevent primary risks. D&M risks should be revisited several times a year to ensure appropriate management. Similarly, monitor risks typically only need to be checked yearly to ensure their potential impact hasn’t grown. Finally, by figuring out which risks are low control, you will know where not to spend time and money.

However, keep in mind that no risk can be completely ignored: make sure you still consider these in future assessments and ensure that the low risk status has not changed 

Receive better insurance premiums

Risk maps can also help your organization in becoming ISO certified, as it shows that you have an understanding of your risk environment and a strategic plan for moving forward.

This can also help you receive competitive insurance premiums. Insurers are looking for “good” risk, or companies they believe will have minimal losses. Presenting your risk management plan and prevention strategies shows the insurer you are actively managing risk, which will result in a lower premium.

Risk maps are recommended for any organization looking to enhance risk management culture. They bring understanding and prioritization to the risk management department. 

What are the types of risk maps?

It should be understood that there are three possible tools that could be used as a risk map.

1. Map of risk factors

Here will be recorded all those risks that could occur within the organization causing damage or destabilization to the objectives set out in the company and a brief description of each of them will be made, in order to identify them in a more direct way and create a primary prevention for each of them. It is also known as a map of working conditions.

2. Map of those exposed to risk

Its purpose is to avoid the consequences that could occur in the population that is exposed to suffer some type of risk, it is also known as a map of the health conditions of the study population and gives the possibility of recognizing which ones could occur internally or externally.

3. Damage map

It stores all the information on the alterations that occur or could occur, together with the other two maps previously explained, it allows collecting the necessary information to continue with the study and to know which risks are more of a priority than others, without neglecting the importance that should be given to each of them.