Risk Management and Loss Prevention’s Contribution

Alexandre Mandaji

Introduction

Risk Management is

not

an insurance transaction.

Insurance is one of the many forms of Risk Financing, that is, a mechanism through which organizations define when and for whom damage costs will be covered, in this specific case, by an insurer.

Our objective is to place Insurance in a wider perspective called

Risk Management

and to discuss how

Organizations

tend to deal with the Risk factor.

Organizations

When we speak of

organizations

be the joint effort of individuals with the goal of reaching collective goals.

, we consider them to The concept can be extended to families and individuals, in that they are all fundamental elements in achieving collective objectives.

Risk Management

Essentially, Risk Management involves three levels: I.

Identify exposures and assess loss potentials; II.

Choose the most efficient combination of methods of control and loss financing; developing and executing its implementation; III.

Continually revise this plan after putting it into effect (

organizations

change often).

Risk Management

Balance and efficiency in carrying out each of the aforementioned levels are fundamental for a successful risk management plan.

In our contribution to the discussion, we will concentrate on the aspects related to the second level, that is, loss financing, with special dedication to preventing such losses.

II. Control and Loss Financing

Fact: every organization is subject to

risk-related costs.

Paying for insurance, taking on uninsured financial losses, incurring training program expenses, investing in smoke detectors: all these expenses related to risks, that is,

loss control costs.

The more organized and efficient the planning and controls, the less the costs will be.

Loss Control

One of the ways of systematizing this organization is by perfecting the efficiency of the controls is by analyzing the issues, breaking them up into categories: 1.

Risk Avoidance 2.

Loss Prevention 3.

Loss Reduction 4.

Financing remaining losses

1. Risk Avoidance

In certain situations, the best way to handle exposures is to avoid the possibility for the loss to occur, eliminating the potential for loss.

In practice, this means limiting exposure.

For example, governments avoid investing in certain countries and businesses prefer avoiding risks related to property confiscation which would cause profit losses.

People sometimes choose their careers based on avoiding jobs that involve high possibilities for sickness, injury, or death. Others avoid professions where the chances of professional success are slim.

1. Risk Avoidance

This reasoning runs up against one fact:

inevitable

... In reality,

most are.

some risks are In other words, most risks can be

reduced, but not eliminated

.

With that in mind, if humanity were to have dealt with risks by always avoiding exposure, perhaps we would still be in the developmental stage of the Middle Ages.

2. Loss Prevention

A successful

loss prevention reduction of loss frequency

.

plan contributes to the To the extent that the benefits outweigh the costs (and this can easily be seen when the costs and benefits are calculated), organizations should use loss prevention to handle all their exposures, whether assumed or transferred to the insurers.

2. Loss Prevention

The primary purpose of loss prevention is the preserve human lives, that is, to reduce or eliminate the possibility of death or personal accidents.

Material damages can be reimbursed with the resources from the organization or insurer, but the trauma and disturbance that usually accompany these occurrences

cannot be financially compensated

.

In the same way, a lawsuit for third-party damages can be properly reimbursed by an insurer, however,

the organization’s image may be affected forever.

2. Loss Prevention

Some losses may be contributed to the hazards of the

physical environment

, such as inadequate design, lighting, ventilation, maintenance practices, etc.

Other losses are more indirectly related to poor judgment, inadequate training or supervision, or a lack of attention to security requirements.

human failures

, such as

Good loss prevention programs are developed for both situations,

but to reach the desired objectives this requires the commitment of management, the motivation of those involved, and the constant attention of the one in charge of risk management.

2. Loss Prevention ”lack of attention to security requirements,” overconfidence or carelessness?

2. Loss Prevention

There is a connection between prevention measures and the amount paid to insurers in insurance premiums. The more effective the prevention, the lower the insurance prices.

In large risk situations, this analysis is done case-to-case, in small or medium risk situations, it is based on experience over time and in considering a portfolio.

There are many examples and recommendations related to loss prevention measures, some of which are described on the following slides:

Examples and recommendations related to Loss Prevention measures

 Promoting defensive driving training when the organization works with transportation and circulation of vehicles.

 Setting up caution signs and warnings regarding dangers.

 Constantly evaluations of electrical installations by trained professionals:  From installation maintenance to equipment use, lighting, heating and cooling systems, etc.

 Correct outlet voltage to avoid the use of adapters and extension cords.

Good example

Bad example

Bad example

Bad example

Examples and recommendations related to Loss Prevention measures

 Keep gutter and drainage systems clean and free of obstructions  Avoid storing flammable materials such as paint. If such items are essential for the job, the stock should be reduced as much as possible and, if possible, stored seperately from the main area.

 Prohibit smoking.

 When using LPG cylinders, store them in an isolated and ventilated location.

Good example

Bad example

Examples and recommendations related to Loss Prevention measures

 Before choosing a property, analyze exposure features, flooding from insufficient drainage systems, and general security.

 When working on welding projects, the work and implementation should be monitored for 24 hours.

 Keep outside areas clean and organized.

Examples and recommendations related to Loss Prevention measures

 Adequate emergency exits for the building’s fixed and fluctuating population  Check for the existence of worn steps, handrails in disrepair, cracked pathways with loose stones, or poor lighting in places for people circulation.

 Individual safety equipment for the workers, such as earplugs in noisy areas, seatbelts, helmets, safety glasses, gloves, clothes, etc.

2. Loss Prevention

Basic Rule:

When there is the chance for loss, the responsible managers should consider Loss Prevention measures with alternatives for dealing with the problem.

3. Loss Reduction

Successful

of losses

.

loss reduction

plans contribute in

reducing the gravity

Despite the best prevention efforts, some accidents cannot be avoided.

Example: Automatic sprinklers aren’t part of prevention but they do reduce the gravity and financial impact of losses. Normally, they pay for themselves in time through insurance cost reductions. Other examples could be: fireproof doors, clear and visible instructions regarding procedures in case of the ingestion of poisonous substances, rescue operations, evacuation drills, and fire squads.

Examples and recommendations related to Loss Prevention measures

 Maintenance of safety systems such as extinguishers, hydrants, sprinklers, smoke and fire detectors, and alarms.

 Periodic testing of the above systems  Forming official emergency teams or fire squadrons, planning emergency training and simulations.

 Fireproof doors and marked emergency routes and exits  Instructions for workers and visitors regarding emergency procedures.

3. Loss Reduction

Basic Rule :

In high-risk situations, when losses cannot be avoided, loss reduction measures are outlined.

Among loss reduction measures, physical distance ought to be highlighted: Although engineering considers a factory that produces 100,000 units to be better than two of 50,000, two distant factories reduce the loss potential. While this decision is significant, similar reasoning can be applied to basic questions such as choosing transportation methods or the sum to withdraw from a bank, or even how much money is kept in the same building.

4. Risk Financing

Even when good loss prevention programs are followed, unfortunately, accidents do happen.

Risk financing policies determine under which circumstances costs will be born and by whom.

The main risk management and control models tend to classify financing forms into categories:  Assumption: assume damages as they occur, without establishing reserve funds;  Self-insurance or financed retention  Insurance

4. Risk Financing

Decisions related to who will bear the losses and when they will do so depend on organization policies, which should consider parameters such as:       Frequency and severity; Greatest damages possible; Accumulation of risks; Mass or amount of risk exposure; Financial capacity, Organization objectives, such as longevity, etc.

4. Risk Financing and Severity

A wind storm damaged a storehouse in Caçador, Oeste de Santa Catarina, on September 8, 2009. Source: clickrbs

4. Risk Financing and Severity

A storm damaged a school gym in Jaraguá do Sul, Santa Catarina, on September 8, 2009. Source: clickrbs

4. Risk Financing and Severity

Burned Transformer

4. Risk Financing and Severity

4. Risk Financing and Severity

Factory fire

Reviewing the stages of Risk Management

I.

Identify exposures and assess loss potentials.

II.

Combine methods of control and loss financing.

1.

2.

3.

4.

Risk Avoidance Loss Prevention Loss Reduction Financing remaining losses III.

Continually revise the plan

III – Plan Revision

After the potential loss sources have been identified and plans are implemented for dealing with them, the program must be revised regularly, seeking to remain up to-date with needs.

In the end, there are changes in all organizations.

Besides the changes, surveys are useful for comparing if the results correspond to the planned objectives.

Some benefits of Risk Management

        First of all, lives saved; Goods saved; Aduquately contracted insurance; Risk reduction and cost reduction (Loss Control) Retained risk awareness; Continuity of the organization and its objectives; Motivated workers; Community well-being

Final Acknowledgement

HDI Seguros appreciates the opportunity to contribute to the discussion of such a relevant topic. At the same time, we congratulate Adventist Risk Management Sudamericana for their valuable initiatve and the organization of the

I Congreso Sudamericano de Gestión de Riesgos

(I Southamerican Conference of Risk Management).

Thank you!

Bibliography

DORFMAN, Mark S.

Introduction to risk management and insurance

[Introducción a la gestión de riesgos y seguros]

.

9th ed. USA: Pearson Prentice Hall, 2008.

HOPE, Warren T. 2002.

Introdução ao gerenciamento de riscos

[Introducción a la gestión de riesgos]

.

Tradução de Gustavo Adolfo Araujo Caldas. Rio de Janeiro: Funenseg, VAUGHAN, Emmett J.; VAUGHAN, Therese M.

Fundamentals of risk and insurance

[principios fundamentales de riesgos y seguros]. 9th ed. USA: John Wiley & Sons, 2003.