Understanding Risk Assessments: A Key Process for Deciding Well

What is a Risk Assessment?

A risk assessment looks for things that could affect a situation or outcome.

Governments and companies use risk assessments to protect themselves from adverse outcomes. They try to think about the worst-case scenario that might occur. A risk assessment is a more formal way of documenting this.

Governments insist upon the use of risk assessments in health and safety situations. The Health and Safety at Work Act made law in 1974 in the UK, has reduced death and accidents by more than 75%. Risk assessments have played a significant role in achieving this.

Companies use structured risk assessments to assess big projects. These could be mergers, new product launches, or global expansions. Common risks evaluated include financial issues, operational challenges and more.

On an individual bias, risk assessments sound too formal. But, when used, they bring the same principles but on a smaller scale.

They also offer another upside.

Naturally, we are optimistic. The pessimism a risk assessment brings ensures a more balanced view. It can save us from having too much faith in ourselves and our decision-making abilities.

The Role of Risk Assessments When Deciding

You can embed risk assessments into your decision-making.

That's what Swiss Re, the global insurance provide did. They have a structured approach to risk assessment and decision-making.

Swiss Re uses a comprehensive risk management framework. They identify, quantify, and order risks. This framework helps them make informed decisions about where to assign resouces. It also guides their strategic plan.

Here’s a brief overview of their risk assessment process:

1. Identify: Recognize and describe potential risks that the business might face.
2. Quantify: Gauge the possible impact and likelihood of these risks using tools such as statistical models, analyses of historical data, and simulated scenarios.
3. Prioritize: Rank and evaluate the identified risks. This gives guidence to where efforts need placing.

This structured approach to risk assessment has helped Swiss Re. They have been able to navigate the complex and ever-changing landscape of the global insurance market. It’s a testament to how risk assessment can guide effective decision-making.

Using Risk Assessments In Your Decisions

On a personal level, you might be thinking how can apply the principles Swiss Re use.

Remember the decision equation?

Information + Action = Outcome

Within the information phase, there are some helpful takeaways we can apply.

The three steps give us a structured method to process the information we gather. This is important, because some information isn't relevant. Filtering it, by attaching it to the outcome gives us something meaningful to work with.

Let's break these down into more detail.

1. Identify. Re-frame the decision as a question. This prompts thoughts about different outcomes.
2. Quantify. Guage the impact. How much damage will a bad outcome cause?
3. Prioritise. Rank the risks. Sometimes risks aren't that great — or are even recoverable.

Now you understand the risks, what can you do to limit the downside if they materise?

You may judge the risk so great, and the downside so bad the decision isn't worth making. Equally, you may see ways to protect your downside. This should give you the confidence to act with haste.

While mastering risk assessments takes time and practice, make a start somewhere. Name two upcoming big decisions and list the risks needing investigation before choosing. Use the three steps to process them.

See how your confidence grows as you decide with more awareness about what could go wrong. A risk assessment is a comforting blanket to use with your decisions. And that makes it a valuable addition to your decision-making toolkit.

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