The risk management process begins with the identification and analysis of loss exposures that confront an organization. Next, alternative methods of handling or reducing these exposures are evaluated. Finally, a risk management program is designed and implemented, emphasizing ongoing review of the program.

Risk Identification and Evaluation

The first step in the risk management process is to identify potential losses to which an organization is exposed. Some types of loss exposures include damage to property, loss of income from damage to property, liability to others, and injuries to employees.

Next, each loss exposure must be studied to determine the potential financial impact on your operations. The maximum dollar amount of loss should be determined, as well as the likely frequency of loss.

Some of the methods we use to identify and evaluate risks include on-site inspections, interviews with key personnel, analysis of your operations and procedures, claim history reviews, building appraisals, and review of inventory and equipment records. We also review any contracts that contain insurance provisions.

Alternative Solutions for Handling Risk

Insurance is only one of the possible solutions for handling risk. The solution selected for a given risk depends on the potential size of loss, the importance of that operation to the organization, and the likelihood that a loss will occur.

Avoidance, or elimination of risk, is the most basic technique available. The organization simply decides not to participate in the activity. This is particularly appropriate for very high risk operations such as blasting or fire works. Instead of performing these tasks in-house, the organization pays outside specialists (fully insured!) to handle these tasks.

Transfer comes in two forms. Insurance transfer is the traditional transfer of risk to an insurance company by purchasing an insurance policy. Non-insurance transfer is the transfer of risk to another party through a contract, such as a lease or construction contract. Transfer is most appropriate for the medium and large loss exposures with low to moderate frequency.

Retention is the conscious decision to handle risks internally. This can be total retention or partial retention through an insurance deductible. Retention is most appropriate for small loss exposures and high-frequency exposures where the likely loss can be clearly identified. Risk Reduction

The next step is to identify those loss exposures that can be reduced through loss control programs. For retained loss exposures, this results in direct savings to the organization. For insured exposures, loss control programs result in lower future premiums.

Loss prevention activities center on reducing the likelihood that a loss will occur. This includes warning signs, safety guards on equipment, and similar activities.

Loss reduction activities emphasize reducing the severity of a loss if it does occur. The installation of a sprinkler system is a good example.

Implementation and Monitoring

After completing the above steps, you will have a framework that will guide you in all risk management decisions. You will have a clear idea of the insurance coverages, limits, and deductibles you want. You will have identified exposures that should be transferred to others. Finally, you know what exposures you have retained. The final step is to implement and monitor your risk management program.