Risk Management Strategies

Risk Management Strategies

Risk Management is defined as the;

The identification of hazards, measurement, and economic control of the risks which threaten the assets or earnings of a company or enterprise.

Risk management is a formal process of identifying the threats to an organization so that the corresponding risk level is evaluated to adapt the appropriate control measures to reduce the risk level to a tolerable level.

Risk Control is the basic objective of this process, hence it can be divided into 2 broad categories as listed below;

1. Loss Control
2. Risk Financing

These above-mentioned categories listed above can be further divided into further sub-categories so that the reader understands the difference between all of them. These 4 Risk-Control strategies are also known as 4Ts.

• Loss Control

1. Risk Avoidance
2. Risk Reduction

• Risk Financing

1. Risk Retention
2. Risk Transfer

An organization adopting the Risk Management Process for risk control can use individual strategies or a combination of these depending on the nature of the risk.

Loss Control

• Risk Avoidance - Avoidance or Elimination

Risk Avoidance is avoiding hazardous work activity thoroughly so that workers are not exposed to the risk at all. For instance, avoid traveling by air to avoid a mid-air collision.

Sometimes, it is not possible to cease the hazardous work activity at all, hence it is mandatory that the Risk Elimination strategy is adopted which takes a wider meaning and implies the removal or risk without necessarily ceasing an activity giving rise to the risk.

Both above-mentioned strategies are the best solution to the problem, still, in some cases, an individual has to estimate the likelihood of a fatality or injury, and based on the judgment, the correct strategy can be adapted to control the exposure to the risk.

Another important factor to remember is that the introduction of control through elimination strategy can inadvertently give birth to other risk factors. For example, to control the manual handling-related risks, robots can be introduced which can cause other harm.

• Risk Reduction - Risk Treatment

It is a common phenomenon that at the workplace all kinds of activities are not avoidable, due to which the organization is compelled to introduce some robust controls to mitigate the risk level to an acceptable level. Hence, the Risk Reduction strategy is adapted to control the risk level by introducing control measures, which is a more economically viable solution.

Risk Reduction is where risk is not avoided or eliminated entirely, but attempts are made to reduce the frequency and severity of a potential loss by introducing the hierarchy of controls starting from substitution to engineering and usage of Personal Protective Equipment (PPEs).

The risk reduction strategy is concerned with the Severity (Consequences) and the Likelihood (Occurance Chances) of potential losses.

Risk Financing

• Risk Retention - Risk Tolerate

Risk Retention or Risk Tolerating is using organizational resources to fund the losses suffered during the operation. In fact, it is a planned acceptance of the losses by deductible, deliberately non-insurances, and loss-sensitive plans, where not all but a portion of the loss is retained.

An organization dedicates a portion of the funds within the organization, but the most important thing is to determine where from the funds will come.

Sources of the funds:

1. Loss payment from the current operating fund - the payment should be a maximum of 5% of the whole operating fund, and the losses should be predictable and identified to prevent irrelevant usage of funds.
2. Depreciation Usage - Usage of depreciation is also common when a large item of expenditure capital is written off for a long period of time. At the time of need that is used to deal with loss.
3. Divert funds from the planned capital investment - The company then uses funds set aside to buy an important capital item because there is a loss that has to be paid for.

Risk Retention Advantages

1. The organization never pays the full premium of the insurance cost, hence it is cheap than the insurance process.
2. No detailed accounting is required.
3. The cost of the claim processing is reduced.
4. The funds can be allocated to the departments and sections.
5. Loss event is dealt with quickly instead of involving in long processes.

• Risk Transfer - Transfer

Risk transferring means transferring the risk from one party to another, for instance paying an insurance premium to the insurance company, or hiring a contractor with relevant experience to perform the job.

The loss is financed from the funds originating from outside the organization when paying insurance premiums. 

1. Insurance & Advantages

Insurance companies propose the premium to the organization willing to get insurance benefits. Now it is up to organizations how they can control the insurance premium, and there are two possible ways listed below;

1. Retain loses, and get little premium;
2. Accept voluntary excess on insurance premium and control losses;

 Advantages:

1. Losses will be dealt with smoothly, few forms will be filled and the claim procedure is well known;
2. The cash is available, and an insurer can get hold of the funds quickly, though they will be released after process not quickly;
3. The insurer can provide valuable information, and guidance, since he is regularly dealing with such risks, and can give you imperative advice.

2. Specialist Contractor Hiring

Sometimes, the insurance premium is too high as proposed by the insurance company, while the loss causes less than the proposed premium, hence the best method is to hire a specialist contractor to perform the job.

This is the most efficient way to avoid hazards, and the task is carried out by professional, experienced, and skilled people in compliance with the local regulations. The mandatory requirement here is the selection of a suitable and experienced contractor with a good safety and compliance record.

Important Note

A good risk manager will make his greatest savings in the area of insurance by;

1. Not insuring where the risk has been eliminated;
2. Monitoring the areas where risk has been reduced significantly;
3. Paying for the retained risks where it is cheaper than insuring;

Risk Management Benefits

The benefits of the Risk Management Process are evident to an organization in terms of Loss Prevention & Business Disruption, but there are some other benefits as well that can be used to support it at an organizational level. These specific benefits conducive to an organization are listed below;

1. Objectives achievement likelihood increases;
2. Encouraging Proactive Management;
3. Improvement in identifying Opportunities and Threats;
4. Regulator requirements compliance;
5. Improved governance;
6. Reliable basis for decision making and planning;
7. Improve risk control, loss prevention, and incident management;
8. Effective allocation and usage of the resources;
9. Improved operational effectiveness;
10. Health, Safety, and Environment (HSE) improve performance;

ISO 31000:2009 - Risk Management Principles and Guidelines

The following principles of effective risk management are set-out in ISO 31000:2009 standard;

1. Risk Management sets out values, and contributes to achieving the objectives and improving the performance of the organization;
2. Risk Management is an integral part of the organization's management system, not a stand-alone activity;
3. Risk Management is an imperative part of the Decision Making;
4. Risk Management addresses the uncertainty explicitly;
5. Risk Management is systematic and structured, and timely;
6. Risk Management is based on the best available information;
7. Risk Management is tailored;
8. Risk Management takes human and cultural factors into account;
9. Risk Management is transparent and inclusive;
10. Risk Management is dynamic, iterative, and responsive to change;
11. Risk Management facilitates continual improvement of the organization;

References

1. ISO 31000:2009
2. Controlling the Risks
3. INDG 163: A Brief Guide to Controlling Risks in the Workplace