Introduction to Risk Management
Risk management is the continuing process to identify, analyze, evaluate, and treat loss
exposures and monitor risk control and financial resources to mitigate the adverse effects of loss.
Loss may result from the following:
financial risks such as cost of claims and liability judgments operational risks such as labor strikes
perimeter risks including weather or political change strategic risks including management changes or loss of reputation Enterprise Risk Management, expands the province of risk management to define risk as anything that can prevent the company from achieving its objectives.
Although accidental losses are unforeseen and unplanned, there are methods which can make events more predictable. The more predictable an event, the less risk is involved since the occurrence can prevented or mitigated; or, at minimum, expenses can be estimated and budgeted. It is this process to make loss more predictable that is at the core of insurance programs.
The key to an economical and efficient risk program is control over the risk management functions with assurance that actions performed are desirable, necessary, and effective to reduce the overall cost of operational risk.
A risk management program is formulated and evaluated around the cost of risk.
The cost of Risk is comprised of:
Retained Losses – Deductibles, Retention or Exclusions
Net Insurance Proceeds
Cost for Loss Control Activities
Claim Management Expense
Administrative Cost to Manage the Program
The benefits of a risk program should result in overall savings to the corporate entity when evaluating these components in the aggregate. Any one specific category may show an increase or decrease in cost when considered individually or by division in a specific time frame.
Types of Loss Exposures within the province of risk
Property– Real & Personnel, Tangible & Intangible
Net Income– Reduction in Revenue or Increase in Expense; can be due to loss of Property (yours or
suppliers, or customers) or loss due to Civil or Statutory fines and judgments, or by loss of Key Personnel Liability– Civil and Statutory (Torts, Statutory Workers Compensation, EPA and other Administrative laws) Personnel– Through Death, Disability, or Retirement Key Personnel or catastrophic loss to many employees
Risk management strategies involve many concepts. Some of them include the following
Elements of Loss Expense
Actual damages to physical assets to repair or replace.
Increase in expenses or reduction of revenue due to loss.
Cost of investigation, legal fees, fines and awarded judgments.
Loss of worker productivity and adverse publicity and public opinion.
Higher potential insurance premiums