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Risk Analysis

Risk analysis is the process of quantifying and qualifying the dangers to a business or investment posed by anticipated or unanticipated events in the wider economic, social, political and natural environment.

Navigator's risk analysis framework includes the following elements:

  • The risk category, e.g. competitive risk (which might translate into sensitivities such as sales price or volume reduction, raw material price increase); macroeconomic or financial risk (typically the impacts of inflation, currency decline or credit availablility); political or regulatory risk (changing taxation terms or expropriation), and others.
  • The risk probability, i.e. the chance and extent the risk has of materlalising.
  • Likely triggers and indicators that the risk event is occurring.
  • Risk sensitivities, i.e. the specific impacts risk materialisation will have on the business plan and financial forecast.
  • Risk mitigation, or what measures should be undertaken from the viewpoint of project design and investment management to minimise or avoid the risk in question.

A proper risk assessment is integral to investment planning and financial forecasting. The utility of this cannot be under-estimated. In one large investment project which occurred in July 2008, for instance, we insisted on factoring a risk of property price devaluation in a target region by 30%. This scenario materialized within two months, following the Lehman brothers collapse and the acceleration of the global financial crisis.

Risk assessment can effectively be combined with Scenario Planning to more fully describe and understand the magnitude of the risk.