Ibis Associates

NEWSLETTER

September, 1999

Volume 1 No. 4

In the last newsletter we discussed the risk management identification process. Identifying risk is the most difficult task in this area of management. Liability and financial risks are common to all industries. Other risk, such as professional liability for doctors, lawyers and accountants may be industry specific. Risks may also be associated with security, safety, financial, public policy, hazard and insurable issues. A current risk issue receiving a great deal of media attention involves Y2K compliance.

In an executive summary format we cannot thoroughly cover such a large topic. We hope that this short briefing will make you think about the ways risk is managed in your firm.

MEASURING RISK

Some risk may be standard or inherent in an industry. It may be considered so small or immaterial in that it does not involve a significant risk to the integrity of the organization. Other risks are unavoidable in that they are simply encountered in the regular course of business. Some risk has serious potential to be disastrous. In measuring risk one must first separate immaterial and unavoidable risks from more serious risk threats to the business. In considering the potential for disaster one must measure the potential for both loss frequency and loss severity. Severity can be measured either by the maximum loss approach (defining the maximum loss potential) or the average loss approach method (the weighted average of the probability of a loss over a range of possible losses). Losses that occur frequently are usually managed as a regular part of business. Therefore, risk managers tend to concentrate on the severe losses.

QUANTIFYING RISKS

As in any company decision cost/benefit analysis is usually employed. Sometimes these goals may be achieve simply by choosing lower insurance deductibles or self insuring these costs. Comparing the cost of training programs against placing the money aside as a reserve for actual loss may help to quantify risk. As in many other business decisions use the lowest present value for future loss costs.

There are also basic accounting considerations to employ when attempting to quantify risks, especially those concerning property. One should value assets by book value, market value, replacement value and appraised value.

 CONTROLLING RISKS

There are five ways to gain control of risk. The first and most obvious way is to insure the risk. This transfers the risk to the insurer. In many instances, self-insurance is similar viable alternative.

The second method is to transfer the risk to a third party. Outsourcing is one way in which risk is transferred to another. Sub-contracting is another similar method that may place the risk outside your own company. It is important in this instance to consider whether the third party has adequate ongoing coverage for the associated risk.

The third method is to attempt to reduce the probability that an adverse event will occur. For example, employee training for issues such as harassment may diminish the chance of a harassment lawsuit. While similarly, periodic fire safety or electrical inspections reduce the probability of a fire or electrical problem.

Fourth is to reduce the magnitude of the loss connected with an adverse event. In the financial markets, hedging is a tool that is often used to minimize risk. Similarly, installing a working sprinkler system will minimize fire loss. A common and frequent example of this method is the implementation of computer backup systems.

Last of all, one can consider completely avoiding the activity that gives rise to the risk. For example, a trucking company may choose not to carry any type of hazardous waste.

SUMMARY

The complete topic of risk management cannot be covered in two short executive summaries. Small businesses tend to have more risk associated with their very survival. That is one reason why small business owners have often been characterized as risk takers. However, the most successful risk takers learn the art of identifying and controlling the their business environment. Please keep in mind that risk management is a system. Periodic checks are necessary to maintain the integrity of risk control system.

How Can Ibis Associates Help Your Organization?

Talk to us about a risk management assessment. Let us teach you how to monitor and assess your risks.

NEXT ISSUE -

Upcoming issues will include topics on crisis management, workers compensation and organization change. We also expect to have a white paper on financial issues for our non profit clients.

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Smile of the day

Can it be a coincidence that "stressed" is "desserts" spelled backwards?

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Small Print

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CONTACT INFORMATION

P. O. Box 417 Telephone: (626) 799-0680

So. Pasadena, CA 91031 Facsimile: (626) 799-6939

E-Mail: MLieberman@IbisGroup.com Web site: www.IbisGroup.com