Risk management is more than a professional specialty; it’s a basic human instinct. Every day, we naturally evaluate and aim to minimize the danger to ourselves and others across a range of situations: crossing the street, purchasing a home, opening an email from an unfamiliar source.
While risk professionals are well familiar with the core principles of risk management, they’re not the only ones who rely on them in their daily thinking and decision-making. A periodic review of these tried-and-true principles of risk management can be reinforcing and refreshing — for industry professionals and lay people alike.
The 5-step process
1. Risk identification: This is just what it sounds like: What risks are presented to me, my organisation, my customers, etc., in the scenario in front of me?
2. Risk analysis: This stage involves gathering data and considering the meaning of the data points over a span of time. An analysis of the identified risks begs one to ask: How often could this adverse event happen (frequency)? And if it does happen, what’s the worst way it could turn out (severity)?
3. Risk control: Risk can rarely be avoided altogether, but this is an opportunity to implement solutions that support risk avoidance, prevention (frequency) and reduction (severity).
4. Risk financing: This is all about the economics of risk. It’s a way to cover any financial losses that the implemented risk control techniques did not prevent from happening.
5. Claims management: When a loss occurs, a claim may be filed to recover damages. Whereas risk financing is about managing the financial impact, claims are about managing the harm done.
Where risk management meets the road
An everyday example may be helpful in illustrating these steps, so you can easily apply them to real-world issues and situations. Think about riding in or driving a car…
1. Risk Identification: You might identify the risk of having an accident due to poor motor maintenance, failure to keep gas in the tank, speeding, or driving under the influence. Another identified risk may be the possibility of damaging property — either the car itself or someone’s property. There is also a risk of financial loss if proper liability insurance is not in place or if the driver gets a speeding ticket.
2. Risk analysis: You could go through several what-if scenarios to identify the potential for event frequency and severity. The worst possible outcome would be a loss of life. Additional analysis may determine that the risk of being in an motor accident is low because the driver is never on the highway or only drives in good weather during daylight, on roads with low speed limits, in a well-maintained car, etc.
3. Risk control: You could follow maintenance and inspection schedules, keep air in the tires and gas in the tank, and follow all driving laws. Risk reduction (lowering the severity of a loss that’s already occurred) might mean ensuring property damage to another person’s vehicle is repaired quickly so the time they’re without a car is limited. If you really wanted to minimize the risk, you could avoid it by not owning or riding in a car; in reality, though, a minimal amount of risk still exists, as you could be hit by a car as a pedestrian or injured while using mass transit.
4. Risk financing: Even with all the proper maintenance and following safe driving guidelines, an accident can still occur. By having appropriate motor insurance, funds are generated by the insurance company to pay for any damage to the car.
5. Claims management: Should an accident happen, a claim may be filed with the insurance company of the at-fault driver to recover for the damage occurred. If the driver at fault was not insured, a different course of action may be necessary to hold the driver personally responsible for the damage.
Workers’ compensation: more risk management in action
Imagine walking into a new position as a risk manager, with responsibility for the organisation’s workers’ compensation programme. Drawing on your familiarity with the five basic principles of risk management, your action plan may look something like this:
1. Risk Identification: Consider the kinds of jobs employees perform and where they work. Are they lifting things, operating heavy machinery, using sharp objects to administer patient care, cutting down trees, flying on airplanes, or seated at desks? To what dangers might they be exposed in their daily work environment?
2. Risk analysis: Collect any relevant and recent historical workers’ comp data available from the organisation’s broker, third party claims administrator (TPA) and internal records. Examine loss runs by occupation, injury type/frequency, root cause and more. Drill down to identify what kinds of workplace incidents are happening more often and the possible exposures.
3. Risk control: Look at what the organisation currently has in place to avoid, prevent, and reduce employee illness and injury. This can include everything from loss control to safety programs. Then, focus on prioritization and implementing effective solutions to fill the gaps.
4. Risk financing: Determine the optimal financial structure for the organisation’s workers’ compensation programme. Is self-insurance right for them, or would it be better to transfer some risk to an insurance carrier? Work with an experienced broker for professional guidance.
5. Claims management: Develop a programme that ensures employees harmed on the job are compensated appropriately and receive high-quality, cost-effective care and support to realize maximum recovery and resume productivity. Consider how the organisation and its employees could benefit from partnering with a TPA on the administration of their workers’ compensation claims.
> Learn more — explore our menu of solutions that can help put the five principles of risk management into practice at your organisation
Tags: Claims, Claims management, Data, decision making, financial loss, integrated, Mitigating risk, Prevention, Risk, Risk analysis, Risk control, Risk financing, Risk management, Risk managers, risk mitigation, risks, specialty, View on people, View on performance, workers' comp, Workers' compensation