dangerous level

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Controlling and preventing loss is a critical goal of risk management. Hopkin discusses two terms – likelihood and magnitude – that relate to this goal. Select one of these terms and briefly describe how it may be taken into consideration when to successfully mitigate loss.

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Risk likelihood or probability in risk analysis is one of the deep-root elements that demonstrate the chance of risk to occur or impact any organization or business at a certain time. That risk can be determined, recognized, and measured so that facilitating the process of risk control. Risk likelihood can be determined on an inherent basis for any particular risk, or can be determined at the current level of risk, paying regard to the control measures that are in place (Hopkin, 2017). Thus, recognizing the causes of elevation in likelihood’s impact will undoubtedly enhance the prevention and risk control approach. For example, when car accidents’ frequencies are increased in any part of the world, the government must look out for the reasons for this peak in the accident number. One of the factors might be the speed limit is too high or at a dangerous level. Thence, the transportation department must minimize the speed limit in the highways and internal roads to control this factor, so the drivers stay at the safety limits, and car accidents will gradually diminish. Control the losses demands factors’ recognition, those leads to a rise in the likelihood of a loss. The losses control using likelihood recognition can be done by halting the factors or minimizing the impact. After the potential risks have been identified, the project team then evaluates each risk based on the probability that a risk event will occur and the potential loss associated with it. Not all risks are equal. Some risk events are more likely to happen than others, and the cost of a risk can vary greatly ( Adrienne, 2019).

Practically, the hazard risk likelihood decreasing aspect will enhance the approach of control and loss prevention. Understanding the nature of the risk and how it will impact and when is the key to acknowledging the hazard risk likelihood. Hopkin (2017) used an example of frequency car accidents for a particular motor company fleet in a specific time and linked that to controlling this hazard risk likelihood by implementing the monthly car maintenance.

References

Hopkin, P. (2017). Fundamentals of risk management: Understanding, evaluating and implementing effective risk management.

Watt, A. (2014). Project management [978-1-77420-013-1]. Retrieved from https://opentextbc.ca/projectmanagement/front-matter.

 

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152 13 Loss control Risk likelihood Risk likelihood indicates how often a risk is expected to materialize. It can also be described as risk frequency. However, using the phrase risk frequency assumes that the risk occurs on a regular basis. The more general term risk likelihood is used throughout this book. Risk likelihood can be determined on an inherent basis for any particular risk, or can be determined at the current level of risk, paying regard to the control measures that are in place. For hazard risks, previous history may be a good indication of how likely the risk is to occur. For a fleet of motor vehicles, there is certain to be a history of vehicle accidents and breakdowns. Controls will be in place to reduce the likelihood of these events. A road haulage company should assess the likelihood of vehicle breakdowns on an inherent basis and also on the basis of current controls. There are, however, difficulties in assessing the inherent likelihood of vehicle accidents, because certain assumptions would have to be taken about what effect the removal of controls would have on the likelihood of accidents. Even if an assessment of the breakdown likelihood at the inherent level cannot be undertaken, the company will still need to determine the importance of the vehicle maintenance programme in preventing vehicle breakdowns and whether the maintenance activities provide value for money. In relation to vehicle accidents, the company may have driver-training procedures in place and, again, the effectiveness of these procedures can be determined by evaluating inherent and current levels of risk. Whether levels of risk are evaluated at inherent or at current level, there is no doubt that benchmarking the performance of the fleet against the average performance of the industry will be a useful exercise. An example of a control measure that has an effect on the magnitude of the risk but may have no effect on its likelihood is the use of seat belts in cars. In simple terms, the driver wears a seat belt to reduce the impact of an accident, because the seat belt has no effect on the likelihood of an accident occurring. The driver wears the seat belt as a control measure for when the accident happens. A sports club will wish to reduce the chances of a key player being absent. The absence may be caused by inappropriate behaviour by a player, resulting in the need for sanctions against that person. Accordingly, the club may decide to introduce Loss control a ‘code of behaviour’ for senior players, and this would include a commitment by each player to follow an appropriate, healthy lifestyle. Failure to comply with the code of behaviour would result in financial and other punishments. The club may also decide that additional controls are required to reduce player absence, including fitness monitoring and social support for overseas players who have recently moved to the country to join the team. It may also be agreed that an attempt should be made to place contractual limits on the ability of national teams to call on its overseas players. These actions will be taken in addition to other loss control activities, such as excellent medical facilities to provide immediate medical care and reduce the damage when an injury occurs. Also, the company may purchase insurance to protect itself against the financial losses associated with the absence of a player. Risk magnitude Reducing the magnitude of a hazard risk is very important. For hazard risks, magnitude is often referred to as the inherent severity of the risk should it materialize. Reduction in overall hazard risk severity will be achieved by reducing both the impact and consequences when the adverse event occurs. The seat belt in a car can reduce the impact of an accident, but has no effect on the likelihood of having an accident. It is possible for a serious fire to occur that results in a considerable amount of property damage and is considered to be very severe and expensive. However, in reducing the severity of a serious fire, the requirement is to reduce the impact of the fire on the finances, infrastructure, reputation and marketplace (FIRM) of the organization. Actions to reduce impact will concentrate on damage limitation at the time of the fire and cost containment after the event. The consequences relate to the effect on the strategy, tactics, operations and compliance (STOC) of the organization. Loss control is concerned with mitigation of the magnitude, impact and consequences of an adverse event. Damage limitation is also an important feature of reputational risk management. When a serious incident occurs that attracts public attention, an organization will need to be able to protect its reputation by reassuring stakeholders that the organization responded appropriately to the event. It is almost invariably the case that the CEO or chairman of the company will arrive at the scene when there has been a serious train or plane crash. There have been examples where a serious incident has occurred and the management of the media by the organization has been very poor. In these cases, it is likely that inadequate attention was paid to pre-incident planning, so that the damage to the reputation of the organization was not effectively minimized at the time the incident occurred. Organizations will also need to be concerned with cost containment. Cost containment following an event is usually based on the business continuity plan (BCP) or disaster recovery plan (DRP) that the organization put in place before the incident occurred. The development of effective BCP and DRP will put the organization in the best position to ensure that the overall cost of the incident is kept as low as possible. 153 Loss control Control of fires in hotels Given the long emphasis on fire peril, perhaps it’s not surprising that improvements in sprinkler systems have been a hallmark of the past 40 years. The single most impressive innovation as it relates to fire has been the advent of the suppression mode sprinkler. Standard sprinklers were control mode sprinklers, which controlled the fire until someone arrived to put it out. The fire could grow and produce a lot of smoke. As hotel fittings became more susceptible to smoke and water damage, the desire was to suppress the fire, not just control it. The new sprinklers resulted in smaller areas being affected by fire with less smoke and less damage. Sprinkler technology has evolved significantly. Where we had a single standard spray sprinkler head, we now have extra-large orifice heads and early-suppression, fast-response sprinkler heads. The use of sprinkler systems has also spread from more traditional manufacturing facilities into light-hazard exposures such as offices and nursing homes. Corporations became more deeply involved in loss control efforts. For example, hotels carried out two initiatives in the early 1980s using controlled fires to prove the efficacy of plastic piping in hotel room sprinkler systems. Before the successful tests, sprinklers relied on iron piping, which was more difficult to install than plastic and which took rooms out of service for days during a re-fit. Hazard risks The range of hazard risks where reducing the magnitude of the adverse event is important will include fraud, health and safety, property protection and efficient operation of IT systems, as well as incidents with the potential to cause damage to reputation. Table 13.1 provides a list of the key dependencies that could give rise to hazard risks, using the structure of the FIRM risk scorecard. When hazard risks materialize, actions need to be taken to reduce the magnitude of the event, as well as mitigate the impact and consequences. Although the main focus of managing hazard risks will be on loss prevention, successful management of hazard risks must also include consideration of damage limitation and cost containment. There is a developing trend in the insurance market towards settling claims in a more efficient and cost-effective manner. This trend is partly based on encouraging organizations to get back to normal operation as soon as possible. Indeed, some insurance companies refer to initiatives of this type as ‘cost containment’. As mentioned previously, reducing the severity of an incident should be seen as part of an overall attempt to implement loss control in an organization. An integrated approach to loss control is important because it will enable the organization to control both the likelihood and impact when a hazard risk materializes. In fact, loss control should be considered to be loss prevention plus damage limitation plus cost containment. 154 Loss control TAb LE 13.1 Generic key dependencies FirM risk scorecard example dependencies Financial Availability of funds/finance Correct allocation of funds/finance Internal control (fraud) Liabilities under control (bad debts and pensions) Infrastructure People skills and experience Premises/plant and equipment IT hardware and software Communication and transport Reputational Brand and brand expansion Public opinion of sector Regulators’ enforcement action Corporate social responsibility Marketplace Regulatory requirements Health of world or national economy Product development (technology) Competitor behaviour Although the most important component of loss control is loss prevention, hazard risks can materialize despite the best efforts of organizations. Adequate assessment of hazard risks is vital, so that appropriate pre-planning of during-the-loss and post- loss actions can be undertaken. Plans should be in place to ensure that the damage caused by the incident is kept to a minimum and the cost consequences of the event are also tightly controlled and contained. Figure 13.1 shows how a bow-tie can be used to illustrate the three components of loss control. Before the event occurs, the organization will have controls in place to seek to achieve loss prevention. As the event is developing, steps should be in place to limit the damage that the event is causing. After the event, cost containment controls by way of business continuity and arrangements to reduce the cost of repair should be activated. Disaster recovery plans will be relevant during both the damage limitation and the cost containment stages. The relationship between the three components of loss control and the type of control that will be selected is considered in more detail in Chapter 16. The types of hazard controls are described in Chapter 16 as preventive, corrective, directive and detective. 155 Loss control FIg URE 13.1 Loss control and the bow-tie Risk source Loss prevention Impact Event Cost containment Damage limitation Loss prevention Another way of looking at loss control activities is that loss prevention is about reducing the likelihood of an adverse event occurring, although it will also be concerned with reducing the magnitude of an event that does occur. Damage limitation is concerned with reducing the magnitude of the event when it does materialize. The contribution of damage limitation will be greatest if actions are planned that can be implemented as the event is actually taking place. Cost containment is concerned with reducing the impact and consequences of the event. Cost containment will be concerned with ensuring the lowest cost of repairs, as well as business continuity plans to ensure that the organization can continue operations following damage to the asset that has been affected. Techniques for loss prevention will vary according to the type of hazard risk that is being considered. For health and safety risks, loss prevention is related to eliminat- ing the activity completely or ensuring that, for example, hazardous chemicals are no longer used. For risks to buildings, loss prevention techniques involve such controls as the elimination of sources of ignition and the control, containment and segregation of flammable or combustible materials. Loss prevention techniques will also include restrictions on smoking and other actions taken to reduce hazardous behaviours by persons using the buildings. For fraud and theft risks, loss prevention techniques will include separation of responsibilities and security tagging of expensive items. Fraud prevention techniques may also involve pre-employment screening. A more detailed consideration of health and safety risks and fraud prevention is set out in Chapters 16 and 23. 156 Loss control Damage limitation Damage limitation in relation to fire hazards is well established. Although sprinkler systems are often considered to be a loss prevention measure, they are in fact the major control measure for ensuring that only limited damage occurs when a fire breaks out. Other damage limitation factors related to fire include the use of fire segregation within buildings, the use of fire shutters and well-rehearsed arrangements in place to remove, segregate or otherwise protect valuable items. After the fire at Windsor Castle in 1992, arrangements were quickly put in place for valuable artwork to be removed from areas of the castle that had not (up to that time) been affected by the fire. Accidents at work still occur, despite the considerable attention paid to health and safety standards and other loss prevention activities. Provision of adequate first aid arrangements is an obvious damage limitation activity and suitable first aid facilities are provided by most organizations. For some high-risk factory occupancies, emergency treatment arrangements and even medical facilities are provided on site. In some cases, these medical facilities will include specialist treatment facilities related to the particular hazards on site. An example is the provision of cyanide antidotes in factories where chromium-plating activities take place using cyanideplating solutions. A simpler example is the provision of emergency eye-wash bottles in locations where hazardous chemicals are handled. The Deepwater Horizon oil spill in the Gulf of Mexico in 2010 provides many risk management lessons. One of the key issues was that the oil spill took some weeks to stop. Loss prevention measures were in place to prevent the oil spill starting and cost containment steps were taken to manage the cost of clean-up, recovery and business continuity. It is, perhaps, the case that the damage limitation measures were not as robust as may have been required. Because the oil leak lasted some weeks, there was opportunity for damage limitation measures to be introduced. However, it does not appear that these measures had been sufficiently planned in advance. Cost containment When a hazard risk materializes despite the efforts put into loss prevention and the efforts that have been put into damage limitation, there may well still be a need to contain the cost of the event. For example, among the activities for minimizing costs associated with serious fires are detailed arrangements for salvage and arrangements for decontamination of specialist items that have suffered water or smoke damage. Cost containment in relation to a fire will also include arrangements for specialist recovery services. The actions that will be taken to ensure that post-incident costs are minimized should all be set out in business continuity, disaster recovery and crisis management plans, as appropriate. The topics of business continuity planning and disaster recovery planning are considered in more detail in Chapter 18. A further consideration relevant to cost containment after an incident is what insurance companies refer to as ‘increased cost of operation’. Most material damage/ business interruption insurance policies will allow for payment of increased cost of 157 Loss control operation. This may arise when an organization has to sub-contract certain production activities, or has to undertake manufacturing work at another one of its factories, which may be located some distance away. If a manufacturer discovers that faulty goods have been released into the marketplace, a number of actions become necessary. The organization should have developed plans in advance of the event for notifying customers of the fact that faulty goods are in the marketplace and how to identify them. The box below considers the importance of product recall in these circumstances. Product recall risk management products could be financially impacted by the direct or indirect costs of a product recall. costs include communications and this could entail purchasing air time on radio and television and notices in newspapers or industry publications. Indirect costs can include lost production time for staff who must focus on the recall process, as well as the hiring of temporary employees to ensure continued production. share. A product recall should be designed to: protect the customer from bodily injury or property damage; remove the product from the market and from production; comply with specific regulatory requirements; protect the assets of the company. 158 Loss control 14 Defining the upside of risk Upside of risk Defining the upside of risk is one of the greatest challenges for risk management. The overall contribution of risk management is to help deliver mandatory obligations, assurance, enhanced decision making, as well as effective and efficient core processes (MADE2). However, there is a desire amongst risk management practitioners to identify a more dynamic range of benefits that can be delivered by successful risk management. Often, these are the unexpected or greater than expected benefits of managing risk. A range of interpretations of the phrase ‘upside of risk’ is possible, and some of these are offered in Table 14.1. There is a belief amongst risk management practitioners that risk management makes a significant contribution to the operation of the organization, and this contribution is often described as the upside of risk. In simple terms, the upside of risk is achieved when the benefits obtained from taking the risk are greater than any benefit that would have resulted from not taking it. In other words, the organization has received an overall benefit from undertaking the activities that resulted in exposure to the risk or set of risks involved. For example, a manufacturing company that produces waste by-products that create a disposal problem may achieve the upside of risk by selling the unwanted byproduct or by identifying a means of adding value to the waste product and selling it as another product stream. This is an example of identifying a difficulty for the business and, in solving that difficulty, acquiring additional benefits that had not been foreseen and were not otherwise available. In simple terms, the upside of risk may just be the reward for taking the risk in the first place. Climbing a challenging mountain may be a significant risk, but the upside of taking that risk is when the climber has safely reached the summit and gains that reward. Another approach is to say that risk management is concerned with achieving the best possible outcomes and reducing uncertainty or volatility. If this is accepted as a definition of risk management, the upside of risk is simply achieving what the organization set out to achieve, by taking the risks that were embedded in the strategy, tactics and/or operations that were involved. 159 159 Defining the upside of risk TAb LE 14.1 Defining the upside of risk Fewer disruptions to normal operations and greater operational efficiency resulting in less downside of risk Specifically identifying positive events during the risk assessment and deciding how to encourage those events Opportunity management, by completing a detailed review of a business opportunity before deciding to embrace it Achieving a positive outcome in difficult circumstances as an unintended and/or automatic result of good risk management Another inter …
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