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 management include:
- 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 concerns:
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.
- Payments made due to the death, disability or resignation of employees.
Risk Control Techniques
- Avoidance of activities which cause loss.
- Reduction of the frequency of loss - risk prevention.
- Reduction of the severity of loss - risk reduction.
- Contractual transfer of responsibility for loss occurrence.
Risk Financing Techniques
- Retention of losses either by design or omission.
- Borrowing of funds or use of bonds or use of other forms of capital
- Contractual non-insurance transfer of responsibility for loss payment.
- Insurance transfer to a non-owned insurance company when and if the exposure is insurable and the cost is not prohibitive.
Risk Management is concerned with all loss exposures, not only the ones that can be insured. Insurance is a technique to finance some loss exposures and, therefore, a part of the broader concept of managing risk; not the other way around.