Steps in Risk Management
Insurance companies expect insureds to exercise some common
sense risk management. In a broad outline, the steps in risk
management may be arranged as follows:
 | Identification and Analysis of Risk | |
| Analysis of Risk Management Techniques | |
| Loss Prevention | |
| Risk Avoidance | |
| Retention of Risk | |
| Utilizing Insurance |
Identification and Analysis of Risk
A careful survey of the business establishment's operations, its
faces and their probability and potential severity. The analysis will
focus not only on the physical assets which are threatened by
destruction or damage - plant, equipment and materials - but also loss
by crime, internally and from sources outside the business; suits by
the government, customers, members of the public, employees,
contractors; interruption of business, etc.
Analysis of Risk Management Techniques
After the risks to which the business enterprise is exposed have been
identified, possible methods of elimination or control of such losses
must be analyzed. Internal control measures, such as inventory and
material flow check, record keeping and similar systems must be
evaluated with an eye on minimizing possible loss.
Loss Prevention
Techniques for preventing or reducing potential losses need to be
studied, and steps must be taken to assure the reasonable utilization of
all such devices. Improved internal control to reduce pilferage and
employee theft, automatic sprinkler systems and fire detection devices
to retard the spread of fire, burglar alarms, protective ironwork to
discourage burglary, pollution control, safety guards to protect against
industrial accidents - all are samples of the more familiar methods of
minimizing losses. The risk management techniques already in
operation must also be reviewed periodically to assure their
effectiveness under changing conditions.
Risk Avoidance
After all potential areas of hazard have been identified, it may become
apparent that certain risks can be avoided entirely by changing
company practices. Thus, a manufacturer of electrical components,
upon analysis of its customers, may decide not to sell to a particular
manufacturer who incorporates the equipment into highly volatile or
otherwise dangerous products which can give rise to lawsuits into
which the manufacturer may be named.
Retention of Risk
The best devised and most advanced techniques for avoiding or
minimizing risk cannot eliminate risk entirely. It now becomes
necessary to distinguish those risks which threaten the financial
stability of the business from lesser exposures which can be met
without undue financial strain. The latter type of risk need not be
shifted to an insurance company and can be retained by the
enterprise. A common example of this sort of hazard is the breakage
of glass windows which does not usually reflect unduly large losses.
Even when a particular hazard is potentially large, small losses from
this same peril may safely be retained by the business establishment.
An insurance policy can be bought to pay only amounts which exceed
a deductible. Economies in premium will result, and these should
exceed the amount of uninsured losses for two reasons:
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