Before Anything Can Be Done About The Risks Facing An Organization, The Risks Must Be Identified
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Introduction Before anything can be done about the risks facing an organization, the risks must be identified. • It is a never-ending task, for new risks are constantly arising. • In addition, it is a process in which one can never be absolutely certain that the job has been done properly. 6-1
Responsibility for Risk Identification In an organization large enough to have a full-time risk manager, risk identification and measurement are primary functions. • For the in-house risk manager, identification is a continuous and never-ending process. • Unless there is someone within the organization with insurance expertise, outside help will be required. 6-2
Outside Help in Risk Identification • Some organizations rely on periodic audits from risk management consultants. • General practice is that most firms without inhouse staff rely upon the agent or broker. • While outside parties such as agents, brokers, and consultants can provide valuable service in risk identification, it is difficult for anyone outside the organization to fully understand the operations of the firm. 6-3
Outside Help and Risk Identification Actually, the process of identifying the risks facing an organization is a two-party job. • Internal personnel are familiar with the operations of the organization. • Insurance agent, broker or risk management consultant is a specialist in handling risk. Whether or not there is a full-time risk manager, someone within the organization must be responsible for risk identification. 6-4
Risk Identification Methodologies Risk identification techniques have developed simultaneously by professionals from different disciplines, each focusing on their own specialty. Insurance practitioners Fire safety personnel Security specialists Industrial loss prevention engineers Accountants Engineers in military and space programs 6-5
Risk Identification Methodologies Because each group has been concerned with a somewhat different problem, the strategies and techniques they adopted for identifying hazards have also differed.
6-6
Identification Methodologies Initially, risk identification was an instinctive process; when an accident or loss occurred, people naturally sought to avoid the circumstances or conditions that caused the loss. • Eventually, risk identification became more sophisticated. • Formal risk identification emerged when the inventories of losses based on experience were recorded and shared with others. 6-7
Identification Based on Past Losses Until recently, the primary methodology of risk identification was the observation of losses that had already occurred. Once a loss has occurred, people seek measures that will prevent the reoccurrence of loss from the same source.
6-8
Insurers and Risk Identification • Insurance companies played a major role in the development of risk identification techniques, usually based on the analysis of past losses. • Insurers developed insurance policy checklists, which in effect identified the various risks for which they offered coverage.
6-9
Insurers and Risk Identification • Underwriters discovered by experience the types of hazards that were likely to give rise to loss, and this information became a part of the science of risk identification. • Because losses vary with the hazards (i.e., conditions that increase the likelihood of loss), insurance actuaries also sought to identify hazards. 6-10
Engineers and Systems Safety Personnel In the 1960s, engineers and scientists in the U. S. military and aerospace initiatives developed a new approach to risk identification. • Much of the activity in which the military and space program were involved represented frontiers in which there was no experience. • Risks with which aerospace engineers were concerned did not lend themselves to transfer, so the concentration was primarily on loss prevention efforts--called Systems Safety. 6-11
Systems Safety A collection of logic and mathematical techniques that are applied to the detection and correction of hazards continually from the early conceptual stage of a product right on through a detailed design and operation.
6-12
Systems Safety • Systems safety objectives are the same as in the conventional safety efforts: to identify causes of losses and either eliminate them or minimize their effects. • It is new in the sense that it applies the most advanced management skills, including the use of mathematics and computers in the most comprehensive manner to attain its objectives.
6-13
Systems Safety Systems safety also differs from conventional safety in that it places great emphasis on the identification of possible causes of losses before the losses happen.
6-14
Risk Identification Tools • Because insurance management is older, the technique of identifying insurable exposures was already highly developed when the risk management movement began. • There are a variety of tools available to assist in risk identification, including questionnaires, checklists, and procedure guides. • The preferred approach to risk identification is a "combination approach," in which all of the tools available are brought to bear on the problem. 6-15
Risk Analysis Questionnaires • The key tool in the risk identification process is a risk analysis questionnaire. • Risk analysis questionnaires, also sometimes called "fact finders," are designed to lead the risk manager to the discovery of risks through a series of detailed and penetrating questions. • In some instances, these questionnaires are designed to include both insurable and uninsurable risks. 6-16
Exposure Checklists • Simply a listing of common exposures. • They are useful to jog the memory before and after inspections, but usually should not be used during an inspection.
6-17
Insurance Policy Checklists • Typically, such lists include a catalogue of the various policies or types of insurance that a given business might need. • One of the most useful and widely used is Coverages Applicable, published by the Rough Notes Company. • Other more detailed coverage checklists, however, are available from other sources.
6-18
Expert Systems • Expert systems used in risk identification incorporate the features of risk analysis questionnaires, exposure checklists, and insurance policy checklists in a single tool. • The PS4 product is a good example. • It includes industry specific risk survey questionnaire and loss control forms.
6-19
Risk Identification Techniques • Orientation • Analysis of Documents • Interviews • Inspections
6-20
Analysis of Documents • Analysis of Financial Statements • Flow Charts • Organization Charts • Existing Policies • Loss Reports • Contracts and Leases • Fire Rate Make-Up • Experience Modification Letters 6-21
Other Documents • Minutes of Board of Directors Meetings • Request for Funds • Company Manuals • Miscellaneous • Annual Reports
6-22
Interviews • • • • • • • • • •
Operations Managers Chief Financial Officer Legal Counsel Plant Engineer Purchasing Agent Personnel Manager Plant Nurse Safety Manager Employees and Supervisors External Parties 6-23
Structured Interview Guide • Similar in many respects to the risk analysis questionnaire, designed for use by insurance agents in eliciting information. • A series of general questions about the organization and its activities.
6-24
Inspections • Just as one picture is worth a thousand words, one inspection tour may be worth a thousand checklists. • An examination of the various operation sites of the firm and discussions with managers and workers will often bring attention to risks that might otherwise have been undetected.
6-25
Risk Management Information Systems • To identify new risks, the risk manager needs a far reaching information system, which yields current information on new developments that may give rise to risk. • In addition, the risk manager needs a system of maintaining the wide range of information that affects the organization’s risk.
6-26
Risk Management Policy Manual • A central repository for all risk management and insurance-related corporate policies. • It should include a complete set of all policies, ranging from the corporate risk management policy itself, such diverse subjects as • the use of company autos by employees for personal business, • policy on the purchase the collision damage waiver on rented cars, and other topics relevant to risks. 6-27
Risk Management Policy Manual Copies of the Risk Management Policy Manual should be distributed to units within the corporation to communicate what the risk management department expects and what the other departments may expect from the risk management department.
6-28
Risk Management Record Systems • Fundamentally, risk management is a problem in decision making. • Information about the organization’s risks are the raw material for these decisions. • Records and statistics on losses and premiums are essential tools of the risk management profession. • Without adequate records, it is difficult to analyze the risks facing the organization and to determine how to address those risks. 6-29
Elements in R.M. Record System 1. Property Valuation Schedule. 2. Vehicle and Mobile Equipment Schedule. 3. Requests for Insurance Bids & Coverages. 4. Insurance Register and Insurance Policies. 5. Claim Report File. 6. Loss Data. 7. Premium and Loss Comparison. 6-30
Risk Management Information Systems • The information becomes more useful when it is combined into a useful data base that facilitates analysis; that is, when it is integrated in a risk management information system (RMIS). • There are a number of vendors that sell prepackaged risk management information system software, but many organizations have developed their own in-house systems. 6-31
Sources of Information for the RMIS • The firm’s insurer or, in the case of self-insured losses, from the third-party administrator (TPA) that is responsible for settling losses. • For retained losses that are not paid by a TPA, the data must be input by the risk management department. • Data on premiums and other risk-related expenditures is available from internal sources, but must be entered into the system by the risk management department. 6-32
Internal Communication System In addition to the record component of the risk management information system, the risk manager needs information channels that ensure that all information relating to the risk management function is channeled to the risk management department.
6-33
Information to be Communicated 1. Construction, remodeling, or renovation of the firm’s properties. 2. New programs, products, activities, or operations, especially those that will require specialized equipment. 3. Acquisition through purchase, lease, or rental of new locations. 4. Litigation involving the organization or any of its employees with respect to their activities as employees of the organization. 6-34
Information to be Communicated 5. Progress on claims in the process of settlement or litigation; information channels from insurance companies, and from lawyers involved in the litigation. 6. Recovery progress of workers during periods of disability, including the ability of the worker to return to work on a light duty basis. 7. Information on hiring activities throughout the organization. 6-35
Responsibility for Risk Identification In an organization large enough to have a full-time risk manager, risk identification and measurement are primary functions. • For the in-house risk manager, identification is a continuous and never-ending process. • Unless there is someone within the organization with insurance expertise, outside help will be required. 6-2
Outside Help in Risk Identification • Some organizations rely on periodic audits from risk management consultants. • General practice is that most firms without inhouse staff rely upon the agent or broker. • While outside parties such as agents, brokers, and consultants can provide valuable service in risk identification, it is difficult for anyone outside the organization to fully understand the operations of the firm. 6-3
Outside Help and Risk Identification Actually, the process of identifying the risks facing an organization is a two-party job. • Internal personnel are familiar with the operations of the organization. • Insurance agent, broker or risk management consultant is a specialist in handling risk. Whether or not there is a full-time risk manager, someone within the organization must be responsible for risk identification. 6-4
Risk Identification Methodologies Risk identification techniques have developed simultaneously by professionals from different disciplines, each focusing on their own specialty. Insurance practitioners Fire safety personnel Security specialists Industrial loss prevention engineers Accountants Engineers in military and space programs 6-5
Risk Identification Methodologies Because each group has been concerned with a somewhat different problem, the strategies and techniques they adopted for identifying hazards have also differed.
6-6
Identification Methodologies Initially, risk identification was an instinctive process; when an accident or loss occurred, people naturally sought to avoid the circumstances or conditions that caused the loss. • Eventually, risk identification became more sophisticated. • Formal risk identification emerged when the inventories of losses based on experience were recorded and shared with others. 6-7
Identification Based on Past Losses Until recently, the primary methodology of risk identification was the observation of losses that had already occurred. Once a loss has occurred, people seek measures that will prevent the reoccurrence of loss from the same source.
6-8
Insurers and Risk Identification • Insurance companies played a major role in the development of risk identification techniques, usually based on the analysis of past losses. • Insurers developed insurance policy checklists, which in effect identified the various risks for which they offered coverage.
6-9
Insurers and Risk Identification • Underwriters discovered by experience the types of hazards that were likely to give rise to loss, and this information became a part of the science of risk identification. • Because losses vary with the hazards (i.e., conditions that increase the likelihood of loss), insurance actuaries also sought to identify hazards. 6-10
Engineers and Systems Safety Personnel In the 1960s, engineers and scientists in the U. S. military and aerospace initiatives developed a new approach to risk identification. • Much of the activity in which the military and space program were involved represented frontiers in which there was no experience. • Risks with which aerospace engineers were concerned did not lend themselves to transfer, so the concentration was primarily on loss prevention efforts--called Systems Safety. 6-11
Systems Safety A collection of logic and mathematical techniques that are applied to the detection and correction of hazards continually from the early conceptual stage of a product right on through a detailed design and operation.
6-12
Systems Safety • Systems safety objectives are the same as in the conventional safety efforts: to identify causes of losses and either eliminate them or minimize their effects. • It is new in the sense that it applies the most advanced management skills, including the use of mathematics and computers in the most comprehensive manner to attain its objectives.
6-13
Systems Safety Systems safety also differs from conventional safety in that it places great emphasis on the identification of possible causes of losses before the losses happen.
6-14
Risk Identification Tools • Because insurance management is older, the technique of identifying insurable exposures was already highly developed when the risk management movement began. • There are a variety of tools available to assist in risk identification, including questionnaires, checklists, and procedure guides. • The preferred approach to risk identification is a "combination approach," in which all of the tools available are brought to bear on the problem. 6-15
Risk Analysis Questionnaires • The key tool in the risk identification process is a risk analysis questionnaire. • Risk analysis questionnaires, also sometimes called "fact finders," are designed to lead the risk manager to the discovery of risks through a series of detailed and penetrating questions. • In some instances, these questionnaires are designed to include both insurable and uninsurable risks. 6-16
Exposure Checklists • Simply a listing of common exposures. • They are useful to jog the memory before and after inspections, but usually should not be used during an inspection.
6-17
Insurance Policy Checklists • Typically, such lists include a catalogue of the various policies or types of insurance that a given business might need. • One of the most useful and widely used is Coverages Applicable, published by the Rough Notes Company. • Other more detailed coverage checklists, however, are available from other sources.
6-18
Expert Systems • Expert systems used in risk identification incorporate the features of risk analysis questionnaires, exposure checklists, and insurance policy checklists in a single tool. • The PS4 product is a good example. • It includes industry specific risk survey questionnaire and loss control forms.
6-19
Risk Identification Techniques • Orientation • Analysis of Documents • Interviews • Inspections
6-20
Analysis of Documents • Analysis of Financial Statements • Flow Charts • Organization Charts • Existing Policies • Loss Reports • Contracts and Leases • Fire Rate Make-Up • Experience Modification Letters 6-21
Other Documents • Minutes of Board of Directors Meetings • Request for Funds • Company Manuals • Miscellaneous • Annual Reports
6-22
Interviews • • • • • • • • • •
Operations Managers Chief Financial Officer Legal Counsel Plant Engineer Purchasing Agent Personnel Manager Plant Nurse Safety Manager Employees and Supervisors External Parties 6-23
Structured Interview Guide • Similar in many respects to the risk analysis questionnaire, designed for use by insurance agents in eliciting information. • A series of general questions about the organization and its activities.
6-24
Inspections • Just as one picture is worth a thousand words, one inspection tour may be worth a thousand checklists. • An examination of the various operation sites of the firm and discussions with managers and workers will often bring attention to risks that might otherwise have been undetected.
6-25
Risk Management Information Systems • To identify new risks, the risk manager needs a far reaching information system, which yields current information on new developments that may give rise to risk. • In addition, the risk manager needs a system of maintaining the wide range of information that affects the organization’s risk.
6-26
Risk Management Policy Manual • A central repository for all risk management and insurance-related corporate policies. • It should include a complete set of all policies, ranging from the corporate risk management policy itself, such diverse subjects as • the use of company autos by employees for personal business, • policy on the purchase the collision damage waiver on rented cars, and other topics relevant to risks. 6-27
Risk Management Policy Manual Copies of the Risk Management Policy Manual should be distributed to units within the corporation to communicate what the risk management department expects and what the other departments may expect from the risk management department.
6-28
Risk Management Record Systems • Fundamentally, risk management is a problem in decision making. • Information about the organization’s risks are the raw material for these decisions. • Records and statistics on losses and premiums are essential tools of the risk management profession. • Without adequate records, it is difficult to analyze the risks facing the organization and to determine how to address those risks. 6-29
Elements in R.M. Record System 1. Property Valuation Schedule. 2. Vehicle and Mobile Equipment Schedule. 3. Requests for Insurance Bids & Coverages. 4. Insurance Register and Insurance Policies. 5. Claim Report File. 6. Loss Data. 7. Premium and Loss Comparison. 6-30
Risk Management Information Systems • The information becomes more useful when it is combined into a useful data base that facilitates analysis; that is, when it is integrated in a risk management information system (RMIS). • There are a number of vendors that sell prepackaged risk management information system software, but many organizations have developed their own in-house systems. 6-31
Sources of Information for the RMIS • The firm’s insurer or, in the case of self-insured losses, from the third-party administrator (TPA) that is responsible for settling losses. • For retained losses that are not paid by a TPA, the data must be input by the risk management department. • Data on premiums and other risk-related expenditures is available from internal sources, but must be entered into the system by the risk management department. 6-32
Internal Communication System In addition to the record component of the risk management information system, the risk manager needs information channels that ensure that all information relating to the risk management function is channeled to the risk management department.
6-33
Information to be Communicated 1. Construction, remodeling, or renovation of the firm’s properties. 2. New programs, products, activities, or operations, especially those that will require specialized equipment. 3. Acquisition through purchase, lease, or rental of new locations. 4. Litigation involving the organization or any of its employees with respect to their activities as employees of the organization. 6-34
Information to be Communicated 5. Progress on claims in the process of settlement or litigation; information channels from insurance companies, and from lawyers involved in the litigation. 6. Recovery progress of workers during periods of disability, including the ability of the worker to return to work on a light duty basis. 7. Information on hiring activities throughout the organization. 6-35
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