A brief introduction to risk management
Risk is present every day in everyone’s life, and in some form, the attempt to manage that risk has been around for a long time. Some insurance companies would have you believe that simple loss control is risk management. So what is a practical definition of Risk Management, and how does it apply to your situation? The term “risk management” has come to mean many different things depending on the given situation. A simple Internet search on the phrase will generate thousands of entries including all manner of risk classification including project, financial, medical, farm, army and innumerable others.
The current structure of Enterprise Risk Management is defined as a process of identifying, analyzing, financing and controlling risk at the most efficient cost to the organization. It is a structured approach which evaluates the process, technology, and people for the purpose of controlling or managing the uncertainties within the enterprise. Since “pure” risk has not changed, the process of identifying and managing that risk is as vital to a firm now as it has been from the time organizations discovered the ability to bring it under their control. Here is a brief introduction to Risk Management.
DEFINITION AND CLASSES OF RISK
In risk management, we use four definitions, each for a particular purpose. The term risk is defined as: (1) the chance or probability of loss; (2) uncertainty concerning loss; (3) a likelihood of outcomes from a given set of circumstances; and (4) the difference between expected and actual losses. There are six general classes of risk including: economic, legal, political, social, physical and juridical.
BENEFITS AND OBJECTIVES OF A RISK MANAGEMENT PROGRAM
An organization can expect to take advantage of an active risk management program, both quantitatively as well as qualitatively. Risk management identifies threats/dangers and exposures. Once identified these items can be addressed in a proactive way protecting from adverse consequences, adding to the competence, litigation awareness and overall cost-effectiveness of the entity. Effective risk management is, however, subject to the organization's appetite or tolerance for accepting some level of risk.
RISK MANAGEMENT PROCESS AND COST OF RISK
The total cost of risk can include many items including insurance premiums, retained losses (active or passive), outside services such as consultants, administrative services, and other considerations which include indirect costs of loss of productivity or opportunity. The process of managing risk requires five steps: (1) Identifying Risks, (2) Analyzing Risks, (3) Controlling Risks, (4) Financing Risks, and (5) Administration of the process.
Some proactive organizations have formed groups in compliance with the Risk Retention Act for the purpose of negotiating and purchasing insurance from a commercial insurer. While remaining separate entities, these groups combine their risk, as well as their resources forming economies of scale to manage and finance their overall needs.
CLOSING THOUGHTS
Effective risk management compels us to examine the various aspects of our organizations to identify and analyze the various risks we face. Does your entity expose others to harm or potential dangers? If so, what are the specific hazards? While addressing those issues we can start taking steps to control, as much as is reasonably and financially possible, the risks associated with our organizations.
Remember that risk avoidance is the most effective control technique; however, it is often the most difficult to implement. In many cases, it is tough to ask and to answer “is this particular event/opportunity worth the risk it poses?" If we feel it is worth the risk, then it benefits us to take the necessary steps to make that part of your organization as safe as possible.
We want to help you in any way that we can. If you would like more information about anything mentioned above, including the practical steps (checklists, policy reviews, contract or lease reviews, waivers, hold harmless agreements, etc.), contact our office and speak with Rick, a Certified Risk Manager, who will be glad to offer you guidance in this complex area.
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