Summary
In general, the main aspects to be taken into account for pure risk management are addressed, which can be defined as a studied process that identifies, eliminates, minimizes, assumes and transfers the non-speculative risks of a company. It is a business discipline that has become an essential element of good administration in general.
Abstract
The present article approaches, in a general way, the main aspects to keep in mind for the administration of risks. This last one can be defined as a studied process that it identifies, it eliminates, it minimizes, it assumes and it transfers the non speculative risks of a company. It is a managerial discipline that has been constituted in essential element of the good administration in general.
Introduction
This article addresses the need to determine the fundamental elements to take into account for the correct understanding of risk management and prevention.
Risk management is a simple concept, but difficult to implement. In essence it consists of five steps. First, identify the areas in which your business is at risk from accidents or malicious acts. Second, do what is necessary to eliminate or minimize risks. Third, determine what are the risks that the company should take. Fourth, transfer the remaining risks, which may be unwise to assume.
Finally, establish an effective program that perpetuates good risk management through every facet of business life.
The first step in organizing an effective risk management program is to locate and identify each of the non-speculative risks, those that you can number. The most dangerous are those that are not easily known. Keep in mind two important rules. First, the survey must include each aspect of the operation. Second, identification should not be done by a company employee, because an employee is too close to the operation to recognize the risk.
General objectives:
- Establish the theoretical framework of the research, derived from the consultation of updated bibliography, both nationally and internationally. Characterize risk management and prevention from an organizational point of view. Determine the fundamental elements to be taken into account within management. and risk prevention. Explain how to proceed for better risk management and prevention.
Methods used:
To prepare this work, qualitative research methods and techniques were applied, such as participatory observation of the risk management process, expert judgment, the review of specialized literature according to the topic being addressed, and the analysis - synthesis of scientific and technical information. In addition, electronic support materials related to the topic were consulted.
Development
Risk study carried out by a person outside the company
It is essential that the risk study is carried out by a person outside the company. Such a candidate may be a member of the board of directors, outside the company; you are sufficiently involved to understand the internal work of the company, but far enough to recognize the risk areas.
A second and better choice is to employ a company that is professionally qualified in this area. It is wise to select an entity that also provides insurance brokerage services. This means that the ever-changing insurance market must be kept in mind every day. It is not feasible to pay for a risk management study that is technically appropriate but not practical for the company.
The smooth line that defines whether a risk is assumed or insured depends on the availability and cost of the insurance. Unless the consulting company you select has direct contact with insurance companies, it can produce a correct but impractical report. For this reason, the best entity that you can choose is the one that works with insurers at the service of its clients and that also provides risk management services, charging fees. This ensures you the best of two worlds.
Regardless of what kind of firm you choose, negotiate a contract specifying the cost of the study, the work to be done, and the final date for the study presentation. It should also be specified that, at the end of the study, the entity would advise you in preparing the insurance specifications to obtain competitive proposals and that it will help you evaluate the proposals.
Minimize or eliminate the risk of loss
Many losses resulting from the responsibility for an operating result, property damage, labor benefits and other risks can often be avoided almost or at no cost to the business. It all depends on whether or not to take into account the possible risks when making decisions. Let's look at the following hypothetical examples.
- After careful study of their losses, at a retail chain of sixteen stores, it was found that one of these was running financial risks three times higher than the others. The cause? The manager of that store did not like to go to the bank every day to deposit the money. All he needed to reduce the risk, in this case, were very emphatic instructions about it. A research and consulting firm that had developed a library like no other relied on huge records and reports it had collected over the years. A fire would have been devastating for this profitable company. However, the irreplaceable library had been placed directly on top of a restaurant.Meal-making places are well known to insurers for their ability to catch fire.A large financial institution invested large amounts of money in an advanced computer system. The system was the life of the company. If the central computer did not work, the entire operation was halted. However, the company decided to place it in the basement of the over 100-year-old building where the parent company operated.
What were you thinking about when you made the decisions? They surely did not consider liquidity risks, the danger of a gas pipeline explosion or a flood due to a heavy downpour, respectively, just to name a few risks. They weren't thinking about risk management.
Human losses and built-in consequences
By reducing human losses in your business, you are probably avoiding the greatest expense for foreseeable risks. Don't forget that people are the most costly cause of losses, and an entity's most important human capital.
As a vigilant risk manager, you must eliminate the chances of critical personnel loss in an accident or catastrophe. Think about the loss your business could suffer if a fire or explosion destroys your production plant and kills a number of employees. Not only could you lose valuable people and expensive inventory, but the company's assets could be exposed to lawsuits initiated by neighbors, survivors, and possibly your customers.
Your company may be responsible for the properties of others. This could apply to employees of other entities that you hired your services, leased equipment or any other property in your possession that belongs to another person or company.
In most cases, the "property owner" insurance will cover damages caused by accidents, except those that are attributable to negligence on your part. To reduce your liability risk, insert a clause in the lease specifying that both you and the property owner agree to exempt the tenant for any damages that are covered by insurance and reimbursed by insurance to the property owner.
For rental equipment, furniture, machinery, or other property, carefully examine the contract. If you are responsible for the good, you must determine its replacement cost and include this value as part of the total risk of the company.
In any case, before taking possession of the assets of another entity or person, you must clearly establish to what extent you are responsible for their security.
Transfer of responsibility
Responsibility can be transferred from one party to the other by means of an agreement. If a business is constructing a new building, for example, the owner may request the contracting construction entity to do the work to take on any liability claims made with the owner. The general contractor may, in turn, ask his subcontractors to exonerate him from any liability resulting from his work. The person or persons who assume the risk of liability are obliged to defend others who are part of the contract, and to pay all damages.
Contractual liability should therefore not be taken lightly. Many entities use their own contract formats and do not accept other written contracts for fear of hidden clauses. As a result, executives do not foresee the need to insure the company against the risk of contractual liability.
Foreseeing this, it is important to consider two things. The first is to include contractual liability in the insurance package. The second is to carefully review the terms of the contract, be it a purchase order, a service and supply contract, or a lease. And, whenever possible, reduce the risk of liability by transferring as many other risks as possible.
Responsibility to hire employees
Your liability risk increases exponentially with each person you employ. In this way, the hiring, promotion and termination of the employment relationship of employees should be handled exclusively by people trained in practices focused on positive actions and equal employment opportunities. You must be able to demonstrate fairness in selecting or terminating an employee relationship.
Every new employee must pass a trial period. This allows both employer and employee to end their relationship without legal prejudice. Ninety days is a generally accepted period of time to get to know each other. Your employment contract must clearly specify that employees are subject to a trial period for the time established, that the company has no obligation to use it for more than this time and that after that period they may be rejected at the discretion of the business. You must also specify that if the employee continues to work after the set time, the change of status from "trial" to "full time" must be confirmed in writing.
If you decide not to employ the person any longer, you will have a better legal basis if the employee knows that the first period is on probation. Leave a space for signature under this “ninety days” clause and have applicants sign it before offering them the position, thus covering themselves from any legal risk that may arise.
Determine what risk is practical for the company to assume
A company that has good risk management assumes as many risks as is reasonable. That keeps insurance premiums to a minimum.
The risks you want to take are those that, if they occurred, would not have a great impact on the financial condition of the company. Making this decision requires a good balance between caution and courage. Risk tends to generate two antagonistic attitudes: One, instinctive fear; the other, the desire to win a bet. Unleashing extreme caution or complete lack of it results in poor management, excessive premiums, or uninsured risks.
How to get the balance?
Determining what risks to take is a process that balances insurance premiums against the cost of uninsured losses and the administrative cost of a risk control and loss prevention program. You can come to a pretty good decision if you have three principles in mind:
- Do not risk more than you can lose: It is a very simple notion based on the financial strength of the company and the availability of funds to cover a loss, if it occurs. Do not insure much for little: The general idea is that you can insure a potential loss of $ 20,000 per $ 100 and so you get a lot of money. If the premium is worth $ 5,000, you should seriously consider whether to take the risk or transfer it. In theory this seems like a simple exercise. But a lot depends on the type of risk involved and the availability of insurance. Consider the downsides: How much risk is there that your office building will collapse in an earthquake? If the building is located in an area with a low probability of earthquakes, you can take the risk. Otherwise, you should study the cost of insurance.
Protect the company against other risks
Every business carries certain risks that the company should not assume. The business manager gets rid of these potential "time bombs" as quickly as possible.
Insurance companies provide removal services for unwanted risks. There is nothing strange or complicated about the concept of insurance. Certainly, in today's business climate it has become difficult to buy insurance and, in some cases, a very difficult commitment. However, the same procedure is used to buy any other service for the company; that is, looking for the best product at the best price. In this way, you can negotiate with an insurance company how to cover the greatest number of risks at the lowest cost.
Establish an effective risk management program
At this point, the company's risk management policy should be written down. Simplify it, but be sure to cover the following areas: Limits of liability, value of compliance obligation, property coverage, and a list of risks assumed.
The risk management policy must be approved by the board of directors so that managers are aware of the company's protection, uninsured risks and liability risks. This approval also exempts the company executive who is responsible for making risk management decisions for the company from blame.
Designing a risk policy is not a one-time job, nor can it be “set in stone”. A healthy risk management program is a permanent process that protects the company's assets as it grows, ventures into new territories, and takes on new risks. It is important, then, that the risk manager and company executives meet, at least annually, to review the risks that have been assumed and those that have been insured, the risk management budget and changes in procedure in the operations of the company.
Uninsured risks should also be in the company's risk management policy. Carefully review each risk to determine if they have increased and, if so, what risk control measures can be developed internally. You may also discover that the company cannot continue to assume a certain risk.
Costs and goals
Is the risk management budget in line with the economic goals of the company?
When calculating the cost of risk management, you should take into account not only the cost of insurance, but other relative costs as well. These include claims paid when risk is assumed, expenses related to risk control strategies (alarm systems and security services, for example) and the salaries of risk management personnel. Total these expenses and discuss ways to reduce costs.
Perhaps you can take on a larger portion of certain risks by increasing the deductible, thus reducing the insurance premium. Here are some ways to lower your insurance costs. As you discriminate and totalize the expenses related to risk management, other ideas to reduce costs will emerge. Change the "insurance" heading in the budget to the "risk management" heading. Keep in mind that the best risk management program uses the least amount of insurance possible.
Conclusions
Risk management is an important function. In the changing business world that is experienced on a daily basis, it is important to know how to distinguish which risk or risks are worth taking, and whether it is prudent to take it (s), eliminate it (s) or transfer it (s). Hence the importance of an adequate risk management that is forward-looking and indicates a plan to be taken into account, and not betting on a decision that does not have foundations whose history justifies it, and thus eliminate or minimize as much as possible any loss.
The following checkpoints will help you determine the size of your risk of loss:
Risk management checklist
- Identify the basic areas in which your company may be at risk. Do not guess what is practical by means of a general plan. Translate the result into money and demonstrate the need for costs. Have the board approve ongoing risk management plans. The board needs information on all plans and, together with management, must set up a series of realistic and periodic reviews. Make sure management understands that the employee hiring system in place can be accountable. This is one of the most volatile areas of business risk and new precedents emerge every day. Management should know them and act accordingly. Never take contractual obligation lightly. Said obligation must be included based on “if it were the case”.Whenever possible, reduce your risk by transferring it to someone else. Don't risk more than you might lose. Learn about the economic strengths and weaknesses of your company and the availability of funds to cover losses. Evaluate the possibilities. You must know the company, its employees and the environment in which its business is carried out. Do not risk much for little. Relate the value of a potential loss to the cost of insuring risk. Write the company's risk management policy. It is not easy but it provides the approach to the way of administration. The policy should include the limits of liability, compliance finances, property coverage and the list of risks assumed. The risk management budget must be compatible with the economic goals of the company.Consider the cost of insurance and all related expenses. Total these expenses and find the most practical way to reduce costs.
Bibliography
- Latin American Congress of Internal Audit CLAI (10.: 2005: Havana). Comprehensive risk management / Carlos Fernando Rozén. Buenos Aires; BDO Becher, 2005. 61 h. Hillson, David. Risk management: important - effective. http://www.risk-doctor.com. Insurance companies. In: Institutions and financial markets: selection of topics / José Carlos del Toro Ríos…. Havana: Editorial Félix Varela, 2005. p. 70 - 101 López, Pascual. Introduction to risk management. In: Fundamentals of corporate finance: Principles of corporate finance. 4. ed. Boston: McGraw Hill, 1993. p.451.Mascareñas, Juan. Financial risk. In: Introduction to operational finance. Madrid: Complutense University, 2004. p. 13-14. Pérez, Matía. Threats vs. Risk, http://es.wikipedia.org/wiki/Administracion_de_Empresas.Ravelo Mariño, A.Implementation of risk analysis. In: International financial administration of the company. 4. ed. Boston: Editorial Allan and Bacon, 1991. p.225.Risgo Financiero, http://es.wikipedia.org/wiki/Risgo_financiero. Types of Risk. In: Risk in the Banking Industry / Joaquín del Águila Quesada…. Cajamar: Caja rural intermediterranea, Barcelona, 2002. p.18.
