“Value and importance of Risk Management”
Risk management and insurance go hand-in-hand. Risk management plays an important and useful role in insurance.
Risk management is based on the theme of “Proactive” approach rather than “Reactive” approach.
The famous saying of “Prevention is better than cure” and “A stitch in time saves nine” appear to complement and support this approach.
Risk management is considered as an effective tool when it comes to risk improvement.
Risk management can improve the way business is conducted traditionally.
Today, we live in a complicated world where things are not as simple and straightforward as in the past.
With the advancement of technology, risk management has become more appealing and demanding at the same time.
Risk management comprises various techniques which will be discussed in some details as below:
A. Risk Elimination
B. Risk Reduction
C. Risk Minimization/Mitigation and
D. Risk Transfer
It may be mentioned here that risk elimination may not always be possible. But this technique should be applied where possible in order to find a permanent solution.
For insurance purpose, risk may be categorized into the following groups:
1. Good Risk
2. Average Risk and
3. Poor Risk
An average risk may be converted into a good risk or an acceptable risk by using some of the techniques mentioned above.
Examples shall include:
A. Risk Elimination
A fire policy having allied perils including Storm;
1. The risk of storm damage to the rooftop of say a factory or warehouse premises made of galvanized iron sheet (GI) sheet may be eliminated by construction of a concrete building throughout including the roof.
2. Fire risk in a warehouse may be eliminated by using a battery operated forklift used for (loading and unloading of goods) instead of using a diesel operating one where leakage of diesel oil could be the source of fire.
3. Risk of fire in a godown due to electrical short circuit may be eliminated by not having electricity at all in the premises.
B. Risk Reduction
1. Strict implementation of “No Smoking” policy may reduce the risk of fire in insured premises.
2. Shutting down a vehicle engine in a gasoline filling station may reduce the risk of fire due to ignition.
3. Using safety gears such as helmet, boot etc. may reduce the number of accidents in a construction site.
C. Risk Minimization/Mitigation
1. Installation of “Sprinkler System” may minimize the extent of loss/damage to property in the event of fire.
2. Similarly installation of a “Fire Door” may do the same trick.
3. Putting goods on 6″-8″ wooden pallet or steel shelves may minimise the risk of possible flood warer damage.
It may be mentioned here that there appears to exist a thin line between risk reduction and risk minimization which may overlap with each other at times.
D. Risk Transfer
1. An insurance buyer may transfer fire risk to an insusrance company for a known amount of money called premium.
2. An insurer may decide to transfer part of the risk to another insurer/reinsurer by way of reinsurance.
3. A reinsurer may decide to transfer some of the risks to another reinsurer by way of retrocession.
Risk management may not act as a “panacea” for all problems. But it certainly goes a long way in the qualitative improvement of risk leading to a reduction in number of fire losses thus making contribution indirectly to national economy.
In today’s world risk management is gaining popularity day by day and its use is felt essential especially in corporate world.
The word risk management is no more a hype or a hollow word. It has now become an essential part of business activities especially when it comes to large and complex business activities namely production or manufacturing unit/factory, oil refinery etc.
The value and importance of risk management cannot be down played or understimated in real world.
[…] Risk survey especially loss assessment or loss adjustment is a technical and complex subject. It is a highly demanding profession worldwide. It requires special skill, competence and technical knowledge. Professional qualification in relevant area is essential. All types of risks inspection add huge values to organization. […]