Risk Management

For the purposes of this resource, the Giersch Group teamed with Mazey, Reed & Brey Insurance Agency to discuss risk management.  An enterprise should be operated within good business practices. One of these practices is proper risk management. Risk Management is a disciplined process designed to protect & preserve the viability of an organization in the wake of unexpected financial and operational losses.  Just as financing, product development, and marketing are critical elements of a successful company, none of these areas are sustainable on a long term basis without an effective Risk Management Plan.

The Risk Management Process – Steps

1. Goal Setting
2. Risk identification
3. Examination & Analysis of Risk Management alternatives
4. Select alternative(s)
5. Implementation of a “plan” incorporating selected alternatives
6. Monitor the results and make changes when/where necessary.

1. Goal setting. In this first step of the Risk Management Process a vision is established for the entire organization.  Senior management must agree on the critical areas of risk that a company faces and create a culture that incorporates the risk management process into decisions and actions at all levels of the organization. The end result is to effectively accomplish these goals.  Leadership support and motivation is vital; without it the results will be compromised. Remember, the Risk Management Process is aimed at making sure that an organization remains viable (produces products, income, profits, etc) in the face of various threats. This is a critical responsibility and fiduciary duty owed to stakeholders, employees and the customers that the organization serves.   
2. Identification of various loss exposures is the second step in the Risk Management Process.  A variety of techniques can be utilized including questionnaires, flowcharts, financial statements, outside consultants, brainstorming and more. It requires objectivity, creativity, and patience as the process attempts to categorize an organization’s vulnerabilities.
3. Examination and Analysis of alternatives.  Teamwork and input from various members of the organization is critical here. The team needs to identify alternatives to reduce or eliminate risks. For example, in manufacturing safety guards reduce the risk of injury.  During this phase, various alternatives will be evaluated for their potential impact to the organization and decisions should be made recognizing the scarcity of resources.
4. Select alternatives.   As indicated above, the selection process should have management support and attempt to strike a balance between affordability, practicality, and accomplishment of pre-determined goals.  The goal for most of our clients is to completely eliminate risks when possible or to reduce them to the lowest level. Most of our clients tend to prioritize safety above cost.
5. Implementation. This is the stage in which the organization implements the specifically evaluated alternatives.
6. Monitoring acknowledges that the risk management process is never complete. It is a dynamic process that requires awareness and monitoring of expected versus actual results and the various changes that require activity throughout the year.

Our experience with clients has demonstrated the need to constantly validate the risk management tools and processes currently in place and functional. Changing processes, staffing adjustments, and the economy challenge our clients which can lead to a breakdown in the Risk Management process.

The creation of a risk management organizational culture can offer a higher degree of certainty that your organization can continue to operate profitably. As economic, competitive, and environmental changes take place, it is critical that the company remain receptive to incorporating changes that accomplish its goals in the most effective manner possible.  

Common Categories of Risk Exposures

The following are useful categories of risks:

1. Property/Assets
2. Liability
3. Income  
4. Personnel – Human Resource

Each category will have its own risks and risk management alternatives. A detailed analysis of the various risks is beyond the scope of this resource, but warrants further discussion. Similarly, the specific techniques for addressing each risk are beyond this resource.

Insurance

After all other risk management techniques have been adjusted, the remaining risks are covered by insurance. Insurance is effectively the transfer of risks to the insurance company. Some relevant things to think about relative to insurance:

• Insurable exposures – Insurance programs can be designed to provide protection for a wide variety of exposures but not all exposures are insurable. Weighing the cost and benefits of insurance within the context of a complete risk management plan is necessary.
• Insurance as a contract – Insurance is a contract and it requires the same amount of attention as that which is given to other contracts. This is important to keep in mind as price is not a fair measure of the value of an insurance program; it is only one component.
• The broker-client relationship – Brokers add value, making it important to understand the value proposition prior to engaging in a relationship. Any sub-standard relationship is costly, thus expectations must be discussed and agreed to upfront.
• The procurement process – Purchasing agents in any industry add value by clearly understanding their client’s mission and the market from which they secure products; this is equally important in the insurance transaction.
• Policy management – Insurance contracts typically have two coverage triggers; retaining and managing. Past insurance policies are based upon the coverage trigger concept i.e. claims made or occurrence.
• Insurance in contracting relationships – Engaging in contracts whether you are the lead, general contractor or a sub contractor requires careful evaluation of the organizations insurance coverage.

Articles for Further Reading

1. Investopedia. “What does Risk Management Mean?” This article is a concise definition of risk management. http://www.investopedia.com/terms/r/riskmanagement.asp?viewed=1
2. Inc. “Risk Management Essentials.” This article highlights some of the risks addressed in the risk management process. http://www.inc.com/tools/2001/03/22216.html

For more information, please visit the Giersch Group at www.gierschgroup.com or contact us at prosper@gierschgroup.com.