McCloskey Risk Management Topic 4 - Managing Enterprise Risk: Risk Control

Risk Control Options

- activities or attempts to control risk

- reduce frequency of the loss

- reduce severity of the loss

- improve predictability of the loss

Avoidance

Stop engaging in the activity that causes loss (reactive) or never engage in the risk that causes the loss (Proactive)

Risk reduced to 0 if properly implemented

Problems with Avoidance

Some risks cant be avoided

- death/illness

- Natural Disasters

-Weather

Avoidance may not be feasible or desirable

- Lose profits associated with activity

Legacy Costs

- May avoid future losses by avoidance

- Might not avoid costs from the past

Trade one risk for another

- Travel on rail vs auto

When is avoidance a good strategy?

- Usually high frequency, high severity claims

- Conduct a cost benefit analysis

- Recall the "cost of risk"

- When "cost of risk" > benefit (profit) from the activity

Loss Prevention

- attempts to reduce the frequency or probability of the loss

- doesn't completely eliminate it

-Activities that attempt to interrupt or break the chain of events that lead to loss

- Activities must take place prior to a loss

EX: speedbumps, training programs, safety inspection, quality control checks, security guards

Loss Reduction

- Assume a loss has or will occur

- What can be done prior to or after the loss to lessen the amount of loss?

- Reduces severity

- Pre loss, loss reduction activities must be set up prior to loss:

- Detection - smoke/heat detectors, alarms

- Private protection - Portable fire extinguishers, standpipes, fire pumps, sprinklers

- Public protection

Standpipes

water pipe system built into buildings to fight fires

Fire pumps

- supplemental water supply

- used when public water supply cannot effectively supply an automatic sprinkler system to increase water pressure and flow

- common in high rise buildings

- strongly linked to standpipes and sprinklers

Sprinklers (reality)

sprinklers activated by heat

each sprinkler individually activates

most fires can be put out with only 1-2 sprinklers

Building Construction

- Some construction holds up better

- Steel vs. Wood

- Fire resistive protection vs. none

Loss Reduction - Public Protection

-public fire department

-fire hydrant (hopefully within 1000 feet)

Post-loss, loss reduction activities

-Salvage operations

-legal defenses (attorney)

-crisis management

-Rehabilitation of injured worker

Separation of Exposure Units

break items or activities or assets or responsibilities down into smaller parts and separate them

Example: one delivery truck vs two, cross-training/job sharing, limit size of the loss from any one occurrence

Duplication of Exposure Units

- Key asset or activity is replicated and held in reserve

- Spare parts

- Back up data

- Copies of records

* Critical that replicate kept in reserve- not in use!

Risk Transfer of Control Type

-Shift the activity or asset exposed to loss to a third party

-also shifts the loss exposure

---the sale of a building

---sell a dangerous product line

-loss exposure cannot return to you