Question

You have been retained by TF to discuss the major Risk Control Techniques generally employed in Risk Management. Identify these techniques and discuss each in terms of how it can reduce the frequency or severity of losses identified answer to the following question:

"Recall that the first step in the Risk Management Process is the identification of loss exposures. Identify at least two loss exposures facing TF in each of the following categories: (1) Property; (2) Liability; (3) Human Resources; and (4) Commercial/Financial."

Answer 1

Risk Management is a continuous process of identifying and analyzing the risks of loss associated with various domains of business of an entity, and arranging for methods and resources to mitigate these losses.

A business entity is subject to many types of risks of loss to it's properties, whether tangible or intangible, corporeal or non-corporeal, movable or immovable, in this dynamic business environment.

To protect the assets and income, the following risk control techniques are adopted :-

1. Avoidance - As per a famous maxim, 'prevention is better than cure'. Vigilance, alertness to details and adopting best business practices to reduce the risk of fraud, embazzlement or other damages to negligent level helps mitigate the risks. For example, daily depositing cash collections in bank, say in a micro-finance based enterprise, instead of keeping it in the office safe would ensure zero vulnerability towards theft.

2. Prevention - This technique enables mitigation of losses to a great extent, but not completely. A certain degree of risk is considered to be acceptable. For example, in the above case, as a company policy, the cash collection is kept in the office safe for two days before its deposited in bank. Now, loss is not being avoided totally, but steps adequate enough to prevent it are being taken by using a strong safe password.

3. Separation - This technique refers to the practice of holding the company asstes at various locations instead of concentrating all of them at one place. This way, even if something catastrophic happens at one location, the damage occurs to only a few assets and not to all. For example, fire broke down at the factory location, but since the warehouse was situated at a distant place, only the machinery got harmed. The goods loss could be mitigated.

4. Duplication - This technique involves creating a back-up facility of the physical assets or virtual guards to these assets. For example, creating a duplicate password to software log-ins, periodically taking the back-up of the important files and folders etc.

5. Diversification - By diversifying the business and entering new product or market lines can enable the company to expand it's customer base and revenues. This way, loss caused by one line of business can be mitigated by the profits of the other.

The various types of loss exposures faced by property, liability, human resource and commerce/finance are explained as below :-

1. Propert : Property refers to something owned or possesed lawfully. Whether it exists in form like building, land, jewellery etc ot intellectual property like ideas, formula etc.

Any thing, person or event that can take away such right of ownwership will be called property loss exposure. Some relevant exmaples are -

> Natural calamity such as earthquakes or floods

> Accident such as fire, theft or terrorist attack

> Human threat like fraud, plagiarism, cheating

> Political or social unrest

> Depression in stock markets due to economic disturbances leading to depreciation in the value of stocks

2. Human Resource - In this case, the loss is not to be interpreted as emotional or personal loss but the financial loss due to loss of life of a person. Person loss does not only include death, but anything that makes a human incapable of contributing to the business lik,

> Permanent injury

> Handicap

> Fatal disease

> Unsound mind etc

Usually it is the small businesses like partnerships and properietorships that suffer directly due to person loss. Companies generally don't have a format that depends on an individual or set of individuals.

3. Liability Loss Exposure ; Liability is a claim against the assets of business or legal obligations of the same. Any event or person that creates the liability of the business is liability loss exposure.

Such liability is called a loss as it becomes an obligation to pay it off. Examples are :

> Corrupt practices of an employee done in capacity of a representative of an oraganisation. Usually business has to pay the cost in the form of law suits.

> A director or a manager signing a wrong contarct by mistake or unintentionally

4. Commercial/ Financial loss exposures - Financial loss exposures are commonly referred to as income loss exposures. They are in the following form :-

> loss of sales due to introduction of better alternatives in the market

> loss of rent due to insolvency of the one liable to pay rent

> loss of production due to under-utilization of plant capacity