Every organization is expected to various risks. While many of them are pure risks like Fire, Explosion, Chemical release etc., where some of them are speculative .Pure risks are handled as operational and safety issues by professionals and finance personnel have to address the risks arising out of failure of above operational and safety measures.
Together they need to ensure that the organization is able to withstand any risk or failure of the systems and can continue its operations without much struggle.
The Risk Management and Insurance Planning is required for any organization to review their risks management strategies and to opt for risk transfer measure like availing insurance covers etc. Many a times the coordination between the technical or operational departments and financial departments is difficult and an unbiased study to technical risk management measures adopted and insurance practices followed will help the management of the organization manage the risk effectively and profitably.
Once they are evaluated and forecasted, loss frequency and loss severity are used as the vertical and horizontal lines in the risk management matrix for one specific risk exposure. Note that such a matrix differs from the risk map described below (which includes all important risks a firm is exposed to). The risk management matrix includes on one axis, categories of relative frequency (high and low) and on the other, categories of relative severity (high and low). The simplest of these matrices is one with just four cells, as shown in the pure risk solutions in Table 1.1 "The Traditional Risk Management Matrix (for One Risk)". While this matrix takes into account only two variables, in reality, other variables-the financial condition of the firm, the size of the firm, and external market conditions, to name a few-are very important in the decision.
|Pure Risk Solutions|
|Low Frequency of Losses||High Frequency of Losses|
|High Severity of Losses||Retention-self-insurance||Retention with loss control-risk reduction|
|High Severity of Losses||Transfer-insurance||Avoidance|
The lower-left corner of the risk management matrix represents situations involving low frequency and high severity. Here we find transfer of risk-that is, displacement of risk to a third, unrelated party-to an insurance company. In essence, risk transference involves paying someone else to bear some or all of the risk of certain financial losses that cannot be avoided, assumed, or reduced to acceptable levels. Some risks may be transferred through the formation of a corporation with limited liability for its stockholders. Others may be transferred by contractual arrangements, including insurance.
The upper-left corner of the matrix in Table 1.1 "The Traditional Risk Management Matrix (for One Risk)", representing both low frequency and low severity, shows retention of risk. When an organization uses a highly formalized method of retention of a risk, it is said the organization has self-insured the risk. The company bears the risk and is willing to withstand the financial losses from claims, if any. It is important to note that the extent to which risk retention is feasible depends upon the accuracy of loss predictions and the arrangements made for loss payment. Retention is especially attractive to large organizations. Many large corporations use captives, which are a form of self-insurance. When a business creates a subsidiary to handle the risk exposures, the business creates a captive. As noted above, broadly defined, a captive insurance company is one that provides risk management protection to its parent company and other affiliated organizations. The captive is controlled by its parent company.
If the parent can use funds more productively (that is, can earn a higher after-tax return on investment), the formation of a captive may be wise. The risk manager must assess the importance of the insurer's claims adjusting and other services (including underwriting) when evaluating whether to create or rent a captive.
Risk managers of smaller businesses can become part of a risk retention group. A risk retention group provides risk management and retention to a few players in the same industry who are too small to act on their own. In this way, risk retention groups are similar to group self-insurance.
Moving over to the upper-right corner of the risk management matrix in Table 1.1 "The Traditional Risk Management Matrix (for One Risk)", the quadrant characterized by high frequency and low severity, we find retention with loss control. If frequency is significant, risk managers may find efforts to prevent losses useful. If losses are of low value, they may be easily paid out of the organization's or individual's own funds. Risk retention usually finances highly frequent, predictable losses more cost effectively. An example might be losses due to wear and tear on equipment. Such losses are predictable and of a manageable, low-annual value.
Loss prevention efforts seek to reduce the probability of a loss occurring. Managers use loss reduction efforts to lessen loss severity. If you want to ski in spite of the hazards involved, you may take instruction to improve your skills and reduce the likelihood of you falling down a hill or crashing into a tree. At the same time, you may engage in a physical fitness program to toughen your body to withstand spills without serious injury. Using both loss prevention and reduction techniques, you attempt to lower both the probability and severity of loss.
In the lower-right corner of the matrix in Table 1.1 "The Traditional Risk Management Matrix (for One Risk)", at the intersection of high frequency and high severity, we find avoidance. Managers seek to avoid any situation falling in this category if possible. Not all avoidance necessarily results in "no loss." While seeking to avoid one loss potential, many efforts may create another. Some people choose to travel by car instead of plane because of their fear of flying. While they have successfully avoided the possibility of being a passenger in an airplane accident, they have increased their probability of being in an automobile accident. Per mile traveled, automobile deaths are far more frequent than aircraft fatalities. By choosing cars over planes, these people actually raise their probability of injury.
The detailed process of the clients business is studied and there under their respective risk inspection is conducted. Based on it a complete risk analysis is done thereafter and then suggest the required covers like Fire, Theft, and Machinery Breakdown etc., based on the type of business it carries out.
Once the detailed analysis of risk inspection is done we suggest the ways in which the severity of the loss can be minimized such as for example in the case of industries the risk mitigation can be done by considering the below features:
Before entering a storm or flood - damaged structure, consider the structural integrity, which may be impacted by the force of the wind on or the force of the water entering the structure.
Fresh moving air discourages the growth and amplification of microorganisms. Open windows and doors and air the structure thoroughly.
Ensure that electrical shock hazards have been eliminated by turning off the supply of electricity (circuit breakers) to damaged areas. Anticipate that electricity may be restored suddenly without notice.