Risk management

Risk Management is the process of planning, leading, and controlling the resources and activities of an organization in order to mitigate its risk of loss effectively. The key to a good risk management program is to balance the risk of loss from unexpected causes against the economic cost of protection. In developing and maintaining an effective program, five critical areas must be addressed:

Related Topics:
Planning - Leading - Controlling - Organization - Risk - Loss

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• Exposure identification and measurement: Of these components, systematic and regular exposure identification, and measurement is the most important. If risk is not identified or appropriately measured, then it cannot be effectively managed.
• Loss prevention and control: Policies and procedures are put into place to either prevent losses from occurring, or to reduce the severity of losses that do occur.
• Risk Transfer: Responsibility for losses is transferred to a third party through a contractual agreement.
• Risk financing: The various methods used to pay for losses.
• Claims Management: While it is important to take the appropriate measures to prevent and/or manage losses before they occur, it is equally important to properly manage losses once they have occurred.

Certain unique exposures may be inherent to a business?s product, operations, the regulatory environment in which it operates, etc. Because no one company or operation is exactly the same, exposure identification and management is the single most important component in the risk management process.

Related Topics:
Business - Product - Operations - Regulatory

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An exposure once identified may not always be able to be fully addressed or mitigated through loss prevention or control techniques. Many times, while the risk that a loss may occur or the ultimate severity of those losses that do occur may be reduced, sufficient risk may still exist, such that the organization seeks to transfer a portion of the remaining losses to a third party.

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In the case of contractual risk transfer, an organization working with a subcontractor, for example, would require that the latter accept responsibility for any losses that may result from their portion of the work. For example, a home builder who subcontracts the wiring of homes to an independent electrician would not want to be responsible if the new home burns down due to faulty wiring, much as the electrician would not want to be responsible if the new home collapsed due to faulty construction. Contractual risk transfer merely seeks to ensure that each party is responsible for the portion of work in their care, custody or control, and that each party maintain adequate insurance to cover any losses from that responsibility.

Related Topics:
Subcontractor - Builder - Wiring - Electrician - Insurance

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In the case of risk financing, the company utilizes various strategies or methods to pay for those losses that have not been prevented, controlled, or contractually transferred to a third party. There are two types of risk financing:

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• risk retention; and
• risk transfer.

In the case of risk retention, the company assumes the risk for financing a loss using company funds. Methods of retention can include expensing losses as they occur, setting up a self-insurance program, funded reserve account, etc. With risk transfer, the risk of loss is contractually transferred to an unaffiliated party, most often a commercial insurance company. In some cases such as workers' compensation or auto liability insurance, the organization may be legally required to transfer the risk of loss to an insurance carrier, regardless of the effectiveness of loss prevention/control initiatives.

Related Topics:
Company funds - Insurance company - Workers' compensation - Auto liability insurance - Legal

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