10/2/2012
CPCU 500
Chapter 3 – Risk Control
Presented by
Cathy Jo Morris, CPCU, FLMI, ACS
Educational Objectives
1.
Describe the six categories of risk
control techniques in terms of the
following:
• Whether each reduces loss frequency, reduces loss
severity, or makes losses more predictable
• How each can be used to address a particular loss
exposure
• How they differ from one another
Educational Objectives
2.
Explain how an organization can use risk
control techniques and measures to
achieve the following risk control goals:
• Implement effective and efficient risk control
measures
• Comply with legal requirements
• Promote life safety
• Ensure business continuity
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Educational Objectives
3.
4.
Explain how risk control techniques can
be applied to property, liability,
personnel, and net income loss
exposures.
Describe business continuity
management in terms of its scope, the
process used to implement it, and the
contents of a typical business continuity
plan.
EO#1 Risk Control Techniques
Risk control is a
conscious act or
decision not to act that
reduces the frequency
and/or severity of
losses or makes losses
more predictable.
Risk control techniques
can be classified using
these six broad
categories:
Avoidance
Loss
prevention
Loss reduction
Separation
Duplication
Diversification
EO#1 Avoidance
-Avoiding one loss
exposure can create
or enhance another
-Complete avoidance
is not the most
common risk control
technique and is
typically neither
feasible nor desirable.
-Loss exposures
arise from
activities that are
essential to
individuals and
organizations. It is
not possible to
avoid these core
activities
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EO#1 Loss Prevention
• Loss prevention – reduces
frequency, may also affect loss
severity, usually implemented
before a loss occurs
• As with avoidance, loss
prevention measures may
reduce the frequency of losses
of one loss exposure but
increase the frequency or
severity of losses from other
exposures
EO#1 Loss Reduction
Loss reduction is a risk control
technique that reduces the severity of
a particular loss
Two broad categories:
– Pre-loss measures – reduce the
amount or extent of property
damaged and the number of people
injured or the extent of injury
incurred from a single event
– Post loss measure typically focus on
emergency procedures, salvage
operations, rehab activities, public
relations, or legal defenses to halt the
spread or to counter the effects of loss
EO#1 Separation
• Separation is a risk control
technique that isolates loss
exposures from one another
to minimize the adverse
effect of a single loss
• The intent of separation is
to reduce the severity of an
individual loss at a single
location
Completed Fireworks!
• Separation can increase loss
frequency
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EO#1 Duplication
• Duplication is a risk
control technique
that uses backups,
spares, or copies of
critical property,
information, or
capabilities and
keeps them in
reserve
EO#1 Diversification
• Diversification is a risk
control techniques that
spreads loss exposures over
numerous projects, products,
markets or regions
• More commonly applied to
managing business risks,
rather than hazard risks
EO#2 Risk Control Goals
Risk control techniques are used to
support the following risk control goals:
Implement
effective and
efficient risk
control measures
Comply with legal
requirements
Promote life
safety
Ensure business
continuity
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EO#2 Risk Control Goals
• Effective
– Enables an organization to
achieve the risk management
goal.
– Based on both quantitative and
qualitative measures
• Efficient
– Least expensive of all possible
measures
– Cash flow analysis helps a risk
manager choose the most
efficient alternative
• See page 3.15 for an example of a
cash flow analysis
EO#2 Risk Control Goals
Cash Flow Analysis
Advantages:
• Same basis of
comparison
• Increase efficiency by
reducing unnecessary
expenditures
Disadvantages:
• Making assumptions
• Accurate estimates
• Organization has other
goals
EO#2 Comply with Legal Requirements
• An organization may be
required to implement certain
risk control measures by state
or federal statute mandates.
– The cost of adhering to legal
requirements becomes part of
the cost of risk
• State laws and regulations are
amended frequently and it is
important for the risk
management professional to
stay apprised of any
amendments.
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EO#2 Promote Life Safety
• Life safety is the portion of fire safety that focuses
on the minimum building design, construction,
operation and maintenance requirements
necessary to assure occupants of a safe exit from
the burning portion of the building
EO#2 Ensure Business Continuity
• Risk control should aim to ensure
business continuity – that is to
minimize or eliminate significant
business interruptions
• Business continuity is designed
to meet both the primary risk
management program post-loss
goals of survival and continuity
of operations
• Because each organization is
unique in its potential losses, each
must also be unique in its
application of risk control
measures to promote business
continuity
EO#3 Risk Control Techniques
Explain risk control techniques for:
property
liability
personnel
net
income
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EO#3 Property Loss Exposures
• Property loss exposures are generally divided
into two categories:
– Tangible
– Intangible
• Risk control techniques applicable to property
loss exposures vary by
– Type of property
– Cause of loss
• Insurance professionals commonly examine
commercial property loss exposures based on
–
–
–
–
Construction
Occupancy
Protection
External Environment
EO#3 Liability Loss Exposures
• Exposures include premises,
operations, products, work comp,
professional, completed operations,
auto, watercraft and management
• Three risk control techniques can
be used to control liability losses
① Avoid the activity that creates the
exposure
② Decrease the likelihood of the loss
occurring
③ Minimize the effect of the loss on the
organization
After a liability loss has occurred,
measures to reduce the severity
should be implemented
Properly
respond to
Consult with
the liability Participate in
an attorney
claim and to
alternative
for guidance
dispute
the claimant
through the
resolution
in order to
legal steps
avoid feelings
of ill will
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EO#3 Personnel Loss Exposures
• Involve preventing and reducing
workplace injury and illness
• Loss prevention measures
typically involve education,
training and safety measures
• Organizations may use separation,
such as restricting the number of
key employees who can travel on
the same aircraft
• Loss reduction measures include
emergency response training and
rehab management
EO#3 Net Income Exposures
• Separation and duplication
measures that enable an
organization to reduce net
income losses by maintaining
operations or quickly
resuming operations
following a loss
• Diversification helps to
ensure that an organization’s
entire income is not
dependent on one product or
customer
EO #4 Business Continuity
Describe business continuity management in terms of
its scope, the process used to implement it and the
contents of a typical business continuity plan
– Post-loss goals of survival and continuity of operations
– A planned response the organization will follow once a
loss has occurred
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EO#4 Scope of Business Continuity Management
• The business continuity process
involves these six steps
Identify the
organization’s
critical
functions
Identify the
risks to the
organization’s
critical
functions
Evaluate the
effect of the
risks on those
critical
functions
Develop a
business
continuity
strategy
Develop a
business
continuity plan
Monitor and
revise the
business
continuity
process
EO#4 Scope of Business Continuity Management
• Business continuity management plans
have been expanded to help an organization
handle interruptions from these:
– Property losses
– IT problems
– Human failures
– Loss of utility
– Reputation losses
– Human asset losses (personnel losses)
Most business continuity plans contain the following:
Strategy the organization is going to follow to manage the crisis
Information about the roles and duties of various individuals in the organization
Steps that can be taken to prevent any further loss or damage
Emergency response plan to deal with life and safety issues
Crisis management plan to deal with communication and any reputation issues
Business recovery and restoration plan
Access to stress management and counseling for affected parties
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The difference between
ordinary and extraordinary
is that little extra.
- Unknown
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