Crisis planning is normally formulated and put in place for managing any crisis situation in the operations of an organization. Such crises range from strikes, breakdown of operating system, fire outbreak to flood disaster.
It may not be compulsory for an organization to put in place all the above mitigating plans for operations in the event of occurrence of risks. Nevertheless, the type of plan to be used by an organization in risk situation depends on:
its risk exposure;
the severity of a loss occurring; and
the nature of its operations.
Generally, there is need for organizations (Kaye, 2004) to expect incidents of risks with the potential to destroy the organization to occur. Therefore, the risk manager has to ensure that:
i) There is a fast, authorized and visible control of risk incident and its aftermath;
ii) Damage is controlled as far as is possible;
iii) Security and safety issues are controlled;
iv) Damage assessments are received with assurance and acted upon;
v) The brand value is protected;
vi) Instantaneous responsibilities are met; and vii) The return to 'business as usual' is accelerated.
SELF ASSESSMENT EXERCISE 4
What should a risk manager do in relation to incidents of risk?
4.0 CONCLUSION
On the basis of the discussion in this study unit, you have understood that risks should be evaluated in relation to their potential severity of impact. In the assessment of risks it is important to take into cognizance the best approach to decisions, by using best educated opinions and available statistics, in order to properly plan for the
implementation of the risk management plan.
5.0 SUMMARY
In this study unit, topics covered include the following:
Risk Assessment
Potential Severity of Impact of Risk
Composite Risk Index
Level of Risk and Self Insurance
Measurement of Level of Risk
Merits and Demerits of Self Insurance
Policy on Level of Risk Retention
Operational Plans against Risks
In the next study unit, you will be taken through the discussion on risk control.
6.0 TUTOR-MARKED ASSIGNMENT
What are the merits and demerits of self insurance to a corporate entity?
Solution to Self Assessment Exercise
SAE 1.
The problems involved in assessment of risks are as follows:
i) Problem of non-availability of relevant information for assessing occurrence of risks.
ii) Use of personal judgment in some cases which may not be helpful.
iii) Use of available statistics which may not be applicable to all risks.
iv) Determination of the rate of occurrence of risks because of the fact that statistical information is not available on all kinds of past incidents of risks.
v) Evaluating the severity of the impact or consequences is often quite difficult in terms of intangible assets.
vi) The valuation of assets, generally, possesses some issue that needs to be resolved in risk assessment.
vii) The information produced on risk for management may not be easy to understand.
SAE 2.
Merits of self insurance are as follows:
i) Savings in risk management expenditure;
ii) Some savings from the cost of taking insurance policy;
iii) No payment of premium on the assets of the organization;
iv) Industry's claims experience does not increase organization‟s cost of risk transfer;
v) There will be direct incentive to reduce and control the risk of loss;
vi) There will be no disputes arising as no contact exists between an insurer and insured in the event of loss;
vii) Funds would be available for engaging qualified personnel for the insurance department.
Demerits in self insurance are as follows:
i) A catastrophic loss without insurance policy could lead to the liquidation of an organization.
ii) An aggregate of losses could have the same effect as a catastrophic loss.
iii) It could lead to tying down investable funds for purpose of risk financing.
iv) Self insurance leads to incurring extra cost on the employment of staff for the insurance unit.
v) Lack of access to technical advice from insurance company on risk management and control.
vi) Contribution to the risk financing funds may not be exempted for tax purposes.
SAE 3.
Categorizations of the severity of loss are as follows:
i. Negligible
ii. Marginal
iii. Critical iv. Catastrophic SAE 4.
A risk manager should take cognizance of the following in relation to incidents of risk.
i) There is a fast, authorized and visible control of risk incident and its aftermath;
ii) Damage is controlled as far as is possible;
iii) Security and safety issues are controlled;
iv) Damage assessments are received with assurance and acted upon;
v) The brand value is protected;
vi) Instantaneous responsibilities are met; and vii) The return to 'business as usual' is accelerated.
7.0 REFERENCES/FURTHER READINGS
Crockford, Neil (1986). An Introduction to Risk Management (2 ed.). Cambridge, UK:
Woodhead-Faulkner.
Dorfman, Mark S. (2007). Introduction to Risk Management and Insurance (9 ed.).
Englewood Cliffs, N.J: Prentice Hall.
Hubbard, D. (2009). The Failure of Risk Management: Why It's Broken and How to Fix It, New Jersey: John Wiley & Sons.
Malonis, Jane A. (Ed) (2000). Encyclopedia of Business, 2nd Edition. Detroit: Gale Group.
Pritchet, S.T. et al (1996). Risk Management and Insurance, 7th Ed., New York: West Publishing Company.
Trieschmann, J.S., Gustavson, S.G. and Hoyt, R.E (2001). Risk Management and Insurance, 11th Ed, Illinois: Spout – Western College Publishing.
Wilcox J.F. (1996). “Risk Management in the Oil Industry”, Journal Of The chartered Insurance Institute of Nigeria, Vol. 2, No. 2, June.
Williams, C.A., Smith, M.L. and Young, P.C. (1995). Risk Management and Insurance, 7th Ed, New York: McGraw-Hill, Inc.
Further Reading
Kaye, D. (2004). Risk Management, London: Chartered Insurance Institute.