After you have identified and evaluated your risks, the next step is to determine of what to do about them. Risk management involves either stopping losses from happening (risk control) or paying for those losses that inevitably do occur (risk financing).
Risk Control Techniques
Controlling a risk is preferable to merely accepting or transferring the possible financial consequences, but complete control is rarely possible. Therefore, the treatment of risks usually involves a mix and mingling of controlling, transferring and funding. Risk control includes those risk management techniques designed to minimize the frequency or severity of accidental losses or to make losses more predictable.
Risk control techniques include;
- exposure avoidance,
- loss prevention,
- loss reduction,
- segregation of loss exposures,
- and contractual transfers designed to protect an organization from legal obligations to pay for others’ losses
Whether a risk is insured or self-insured, the services provided by your insurance provider or a service organization will play an extremely important part in determining your long range costs. Safety engineering can assist in reducing the number of losses, but the prime responsibility for these functions has to lie within one’s own organization. Reducing the amount or severity of claims requires the joint effort of an insured and the claims department of an insurer. A major factor to be considered when purchasing insurance is the manner in which claims are going to be investigated, defended and settled.
Risk Financing Techniques
Risk financing techniques encompass all the ways of generating funds to pay for losses that risk control techniques do not entirely stop from happening. These sources of funds, or risk financing techniques, can be classified into two large groups:
- retention (the funds for paying losses originate within the organization),
- and transfer (the funds originate from a source outside the organization)
The distinction between retention and transfer is useful in analyzing and planning to meet your organization’s risk financing needs, note that some risk financing arrangements may involve elements of both retention and transfer.
Selection of Alternatives
After you have systematically considering how various risk control and risk financing options might be applied to particular loss exposures, the next step is to establish and apply criteria to determine what combination of risk control and risk financing techniques is best in serving your organization’s objectives.
Selecting the best risk management technique, or more often combinations of risk control and risk financing techniques, is a two-step activity. The first requires forecasting the effects the available risk management options are likely and the second is defining and applying criteria that measure how well each alternative risk management technique contributes to cost-effectively to the organizational objective.
Risk management techniques are chosen on the basis of effectiveness and economy. Effective means capable of achieving the desired goals, such as organizational survival, minimum profit level, growth, and legality. Economic means least expensive of the possible effective ways.
Most organizations choose risk management techniques by financial criteria, that is, choose those techniques which have the greatest positive (or least negative) effect on rate of return.
The next article in the series focusing on Risk Management will highlight the step that many organizations fail in completing; Program Monitoring.