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Risk Control • Avoiding losses has always been one of humanity's greatest concerns, and risk control was undoubtedly the first risk management technique. • Broadly defined, risk control encompasses all techniques aimed at reducing the number of risks facing the organization or the amount of loss that can arise from these exposures. • Risk control includes risk avoidance and risk reduction. 9-1

Risk Avoidance • Technically, avoidance takes place when decisions are made that prevent a risk from even coming into existence. • Risks are avoided when the organization refuses to accept the risk even for an instant. • An example is a firm that considers manufacturing some product but, because of the hazards involved elects not to do so.

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Risk Avoidance • While avoidance is the only alternative for dealing with some risks, it is a negative rather than a positive approach. • If avoidance is used extensively, the firm may not be able to achieve its primary objectives. • For this reason, avoidance is, in a sense, the last resort in dealing with risk. It is used when there is no other alternative.

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Risk Avoidance • Risk avoidance should be used in those instances in which the exposure has catastrophic potential and the risk cannot be reduced or transferred. • Generally, these conditions will exist in the case of risks for which both the frequency and the severity are high.

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Risk Reduction • The term risk reduction is used to define a broader set of efforts aimed to minimize risk. • Other terms that were formerly used, and which have been displaced by the more generic term "risk reduction" include "loss prevention" and "loss control." • The term " risk reduction" is considered to include both loss prevention and loss control efforts. 9-5

Risk Reduction • Broadly speaking, "loss prevention" efforts are aimed at preventing the occurrence of loss. • In addition, "loss control" efforts can be directed toward reducing the severity of those losses that do occur. • In other words, some risk control efforts aim at reducing frequency, others seek to reduce the severity of the losses that do occur.

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Historical Neglect of Risk Control • Although the situation has changed with the growth of risk management, there was a time when risk control was relatively neglected. • In theory, risk control measures should be used when they are the most effective technique for dealing with a particular risk. • Risk control should be used up to the point at which each dollar spent on such measures produces a dollar in loss reduction. 9-7

Difficulties in Applying Marginal-Cost Marginal-Benefit Analysis • Applying marginal-benefit marginal-cost analysis to the risk control process is complicated by several factors. • The benefits are in the future and are elusive, requiring measurement of something that does not happen (losses). • Given the uncertain nature of the future benefits from loss reduction and the immediate cost, it is probably not surprising that the expenses often lose in competition with other funding needs. 9-8

Government Standards • The theory behind government regulations related to safety is that businesses will not implement the desired safety measures unless they are compelled to do so. • In other cases, legislators have simply concluded that the public interest—defined in terms of injuries and deaths prevented— outweigh corporate profits in importance.

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Government Standards • Once adopted, statutory standards become mandatory for all entities covered by the law. • Occupational Safety and Health Administration (OSHA) regulations are perhaps the best example of statutory loss control standards. • OSHA was a legislative recognition of the fact that businesses must sometimes be compelled to make loss prevention expenditures.

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OSHA Standards • The law was passed to force employers to incur loss prevention costs related to employee safety without regard to marginal benefitmarginal cost analysis.

• If the employers could not find justification for employee safety expenditures on a costbenefit basis, Congress would give them the incentive to do so by imposing penalties for failure to do so. 9-11

Voluntary Standards • In addition to government (statutory) standards, there are also a number of voluntary or consensual standards. • These are standards that have been adopted by nongovernment groups to provide private advisory guidance. • Although not legally binding, voluntary standards can have an important influence on the safety efforts of those to whom they are intended to provide guidance. 9-12

Voluntary Standards • Often, voluntary standards gain significance because they are used as performance measures by insurance companies. • The standards promulgated by the Underwriters Laboratories (UL) are a case in point.

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Facets of Risk Control A well designed loss prevention and control program should encompass five major areas: • personnel safety • liability loss control • automobile safety • property protection • security

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Differences in Required Expertise • Many of the techniques used in risk control are specific to one area or another, and while the underlying approach may be theoretically the same, different skills are required. • Preventing employee injuries obviously calls for different expertise than reducing the risk of a directors' and officers’ liability suit, or preventing embezzlement, but all require a mixture of technical skills. 9-15

Responsibility for Risk Control • There are many authorities who feel that responsibility and authority for the development of a total loss prevention and control program should be vested in a single person. • The risk manager, by virtue of his or her familiarity with the exposures of the organization and the costs arising from such exposures, is a logical person to whom such responsibility might be assigned. 9-16

Risk Manager and Risk Control • The risk manager will rarely possess the wide range of skills required for a comprehensive loss prevention and control effort. • What he or she really needs is the ability to recognize the need for risk control and the managerial skills necessary to accomplish the desired goal through the efforts of those who have the needed skills.

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Other Assignments of Responsibility • In those firms in which a Safety Director already exists, that individual's position might be enlarged to include responsibility for total loss prevention, not just personnel safety. • In other firms, where there is no safety director, responsibility for this function should be assigned as a part of the total responsibility to a Director of Loss Prevention and Control. 9-18

Theories of Accident Causation There are two major theories concerning accident causation, each of which has some explanatory and predictive value. 1. the domino theory developed by H. W. Heinrich, a safety engineer and pioneer in the field of industrial accident safety. 2. the energy release theory, developed by Dr. William Haddon, Jr., of the Insurance Institute for Highway Safety. 9-19

Heinrich's Domino Theory • According to Heinrich, an "accident" is one factor in a sequence that may lead to an injury. • The factors can be visualized as a series of dominoes standing on edge; when one falls, the linkage required for a chain reaction is completed. • Each of the factors is dependent on the preceding factor. 9-20

Personal Injury

Accidents

Personal or Mechanical Hazard

Faults of Persons

Ancestry or Environment

Heinrich’s Domino Theory

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Heinrich’s Domino Theory 1. A personal injury (the final domino) occurs only as a result of an accident. 2. An accident occurs only as a result of a personal or mechanical hazard. 3. Personal and mechanical hazards exist only because of the fault of persons. 4. Faults of persons are inherited or acquired as a result of their environment. 5. The environment is the conditions into which an individual is born. 9-22

Heinrich’s Domino Theory • When there is an injury or property damage, all five factors are involved. • If the fifth domino falls, it is because the first domino fell causing the others to fall in turn. • If one of the factors in the sequence leading to an accident can be removed, the loss can be prevented. • For example, eliminating an unsafe act makes the action of the preceding factors ineffective. 9-23

Heinrich’s Domino Theory • Heinrich held that a person responsible for loss control should be interested in all five factors, but be concerned primarily with accidents and the proximate causes of those accidents. • The factor preceding the accident (the unsafe act or the mechanical or physical hazard) should receive the most attention.

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What is the Primary Cause of Accidents? After a study of 75,000 industrial accidents, Heinrich concluded that 98% of all accidents are preventable. 88%

of accidents result from unsafe acts of individuals

10%

of accidents result from dangerous physical or mechanical conditions.

2%

of accidents result from "Acts of God."

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Accidents, Not Injuries • Heinrich also emphasized that accidents, not injuries or property damage, should be the point of attack. • An accident is any unplanned, uncontrolled event in which the action or reaction of an object, substance, person, or radiation could result in personal injury or property damage. • If a person slips and falls, an injury may or may not result, but an accident has taken place. 9-26

William Haddon's Energy Release Theory • Instead of concentrating on human behavior, Haddon treats accidents as a physical engineering problem. • Accidents result when energy that is out of control puts more stress on a structure (property or person) than that structure can tolerate without damage. • Situations in which "energy is out of control" could include fire losses, accidents, industrial injuries, and virtually any other situation in which injury or damage can result. 9-27

Haddon’s Energy Release Theory Haddon suggested ten strategies designed either to suppress conditions that produce accidents or to enhance conditions that retard accidents. 1. Prevent the creation of the hazard in the first place.

2. Reduce the amount of the hazard brought into being. 3. Prevent the release of the hazard that already exists. 9-28

Haddon’s Energy Release Theory 4. Modify the rate or spatial distribution of release of the hazard from its source. 5. Separate in time or space the hazard and what to be protected. 6. Separate the hazard and what is to be protected by interposing a material barrier. 7. Modify relevant basic qualities of the hazard. 8. Make what is to be protected more resistant to damage from the hazard. 9-29

Haddon’s Energy Release Theory 9.

Begin to counter the damage already done by the hazard.

10. Stabilize repair and rehabilitate the object of the damage. Generally speaking, the larger the amount of energy generated relative to the resistance level of the property or persons exposed to the energy, the lower numbered (the earlier) the strategy must be employed to control it. 9-30

The Two Theories Compared • The difference between the Heinrich and Haddon theories can be viewed as a difference in emphasis. • Both theories explain a sequence that leads to damage or injury. • Heinrich places most of the blame for accidents on human behavior. • Haddon concentrates on the physical engineering aspects of the conditions that give rise to accidents. 9-31

Approaches to Loss Prevention and Control Some loss prevention efforts are aimed at mechanical and environmental factors, and seek to eliminate hazards. • These are referred to as the "engineering approach." Other loss prevention measures focus on the individual, and seek to modify human behavior. • This is the "human behavior approach." 9-32

Engineering Approach The engineering approach to loss prevention and control emphasizes the elimination of unsafe physical conditions by such measures as fire resistive construction, burglary resistant safes, boiler inspections, and safer cars.

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Human Behavior Approach • The human behavior approach stresses safety education and the motivation of persons. • Proponents of this approach to loss prevention argue that most accidents are committed by unsafe acts, and that the greatest gains in safety and loss prevention can be achieved through efforts aimed at modifying human behavior.

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Human Behavior Approach The efforts aimed at modifying human behavior include Education and Enforcement. Education.

The first ingredient in the human behavior approach to risk control is education; making people aware of the benefits of safety.

Enforcement.

For some reason, some people feel immune to injury from the hazards they face and must be compelled to follow safety rules. 9-35

Control Measures and Time of Application • Another way by which loss control measures can also be classed is according to the time at which they are applied. • Haddon suggests that loss prevention efforts can be classified as pre-event actions simultaneous-with-event actions post-event actions 9-36

Control Measures and Mechanism Another classification focuses on whether the loss control measure is aimed at • the person, • the mechanical device or mechanism, or • the environment within which the accident occurs.

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Figure 9.3 Timing and Targets of Control Measures Prior to Event

At Time of Event

After Event

Individual Machinery Environment 9-38

Specialized Loss Control Techniques •

Separation of Assets

•

Salvage

•

Rehabilitation

•

Redundancy

•

Noninsurance Transfers

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Systems Safety • The initial stimulus for systems safety was the creation of the intercontinental ballistic missile (ICBM) system during the cold war. • Systems safety developed further in the U.S. space exploration program.

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Systems Safety Methods • Because the problems that it addressed were complex, the common-sense logic approach was supported by mathematical tools that are common to engineering projects. • Systems safety is not a single methodology, but a variety of different techniques designed to analyze systems and identify potential system failures.

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Differences from Traditional Safety Approach • A first distinction between systems safety and the traditional approaches to safety is in emphasis in systems safety on identifying losses that have not yet occurred. • Systems safety attempts to identify potential failures before they occur so that measures can be taken to prevent their occurrence.

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Differences from Traditional Safety Approach • A second difference in systems safety was its abiding faith in the principle of causality. • Systems safety rejects the notion that accidents are a matter of chance and simply happen. • Instead, accidents are viewed as inevitable when preceded by a series of acts or omissions. • By abandoning the notion that accidents are unavoidable attacks of fate, the scenario is altered dramatically. It means that accidents can be prevented. 9-43

Hazard Mode and Effect Analysis • Attempts to summarize not only the system component whose failure could trigger a loss, but the importance of the failure and the measures that can prevent the failure. • HMEA analysis is generally summarized in tabular form, as shown in Table 9.1. • The specific questions that are addressed in HMEA analysis are indicated in the headings in Table 9.1. 9-44

Hazard Mode and Effect Analysis Hazard Mode

The undesirable event that could occur or desirable event that could fail to occur.

Hazard Mechanism

The hardware or software that could cause failure.

Hazard Cause

Physical, chemical, or human reasons failure could occur.

Hazard Effect

Immediate function result of the hazard mechanism.

Hazard Severity

Ultimate impact of the malfuction. 9-45

Hazard Mode and Effect Analysis Hazard Detection

The very first indication or observable exhibition of a hazard mechanism.

Hazard Probability

A rough estimate of the malfuction’s likelihood.

Hazard Deterrents

Response to question “Is it possible to eliminate this hazard?”

Hazard Prevention Action

Action that, if implemented, would control hazard.

Hazard Control Resources

Dollar value of resources required to implement preventive action. 9-46

Fault-Tree Analysis • Fault Tree Analysis (FTA) is a second technique of systems safety, designed to identify system faults by identifying the causes of events. • It was invented in 1959 at Bell Laboratories to address what developers of the USAF Minuteman intercontinental ballistic missile (ICBM) system felt was an excessive risk in the system. 9-47

Fault-Tree Analysis • FTA is a usually performed by a graphic diagram (called a fault tree) that traces the relationships between all minor events that could lead to a major undesired event. • A fault tree has two major elements: (1) logic diagramming, which connects, by means of and and or gates the sub-events that contribute to the ultimate undesired event at the top of the tree and (2) the sub-events themselves. 9-48

Fault-Tree Analysis • The tree is progressively constructed downward by repeating the question “What must happen for the event or sub-event to occur?” • The necessity and sufficiency of each sub-event in the causality of the following event is indicated by the type of gate; and or or. • If more than one sub-event at a given level must occur before the event above them will result, an and gate is used. 9-49

Sever Fingers With Power Saw

and

Power turning blade

Finger in blade path

or

No blade guard

Improper guard 9-50

Sources of Assistance for Risk Control • There are numerous organizations in our society dedicated to promoting safety and loss prevention. • Many of the major advancements in risk control have come directly from the efforts of insurance companies, both individually and collectively.

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Insurers’ Loss Control Organizations • Factory Mutuals and the Industrial Risk Insurers focus as much on loss prevention services for their insureds as on indemnification for losses. • The National Fire Protection Association, which was formed in 1896, grew out of the loss prevention efforts of insurers. • Insurance companies created the Underwriters Laboratory that investigates and tests electrical materials and products to determine that fire prevention and protection standards are met. 9-52

Insurers’ Loss Control Organizations • The Hartford Steam Boiler Inspection and Insurance Company, organized in 1866, originated boiler inspection services. • Underwriters Salvage Co. assists in loss adjustments through reclamation, reconditioning, and disposition of damaged goods. • The insurance industry also works closely with and supports the efforts of the National Safety Council and similar public safety organizations. 9-53

Loss Control Services Insurers • In view of the historical emphasis of insurers on loss prevention and control efforts, it is not surprising that insurance companies remain one of the most widely used sources of loss prevention and control assistance. • Insurers conduct loss control activities both for their own benefit and as a service to their insureds.

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Benefit to Insurers • The major benefit to the insurer is in making accounts more profitable by reducing the amount of losses. • An insurer’s loss control specialists can sometimes devise ways to improve loss experience to an extent that allows the insurer to write an account that would otherwise be unacceptable.

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Insurer Loss Control Services There are three general levels of loss control services that are provided by insurers. • A physical survey, which serves primarily for the collection of underwriting information. • Risk analysis and risk improvement , which includes loss control recommendations. • Safety management programming— represents a “full-service” approach to safety assistance.

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Other Risk Control Resources The Legal Profession - Although it is not common to think of lawyers as loss prevention and control specialists, it is clear that in the post-loss phase of liability loss control, they are the major players. Accountants - The accountant is a major loss prevention and control specialist in the field of employee crime.

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Disaster Planning • The objective of a disaster control plan is to allow those responsible for the enterprise during an emergency to focus on the solution of major problems. • To accomplish this objective, the disaster plan establishes an emergency organization, designed to perform specific tasks before, during, and after a disaster. • The purpose of a disaster plan is to provide management with a planned course of action to guide it in disaster or emergency situations. 9-58

Disaster Planning • An initial step in developing the disaster plan is to establish priorities that will be followed in resolving conflicts in developing the plan. • This advance determination of priorities will guarantee that appropriate attention is given to the rankings, and that decisions regarding priorities do not have to be made under the confusion and pressures of an actual disaster.

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Organization Disaster Priorities • The first priority will be to protect human life. • The second priority will be to prevent or minimize personal injury. • The third priority will be to prevent and minimize the potential damage to physical assets. • The fourth priority will be to restore normal operations as quickly as possible. 9-60