3 Phases of Risk Management ~ Insurance Academy

There are 3 stages/phases of a risk management, namely:

• Risk identification
• Risk evaluation
• Risk control

The risk management process can be described as follows:

Risk management is much broader than insurance because it includes not only pure risk, but also other risks (all possible risks). The diagram above shows that insurance is involved in the financial transfer of risk stage. Insurance is a risk transfer mechanism related to risk management. So, basically insurance is a sub unit of risk management.

Risk Management Method


1. Risk Identification
Here the risk is seen from a broad scope, not limited to risks that can be insured. By using risk identification tools, steps are taken to look at all aspects that can cause the company to suffer losses.

Risk identification techniques:

a. Organisation structure
This chart shows the overall organizational structure of the company. This chart shows the relationship between personnel so that it can show weaknesses in the organizational structure that can cause problems for risk management.


Example:
inadequate division of labor
personnel ability/competence

It is also used to see if the organization chart is appropriate to be applied in the company.

b. Flow chart
This flow chart is useful for companies where the production system involves the process from raw materials to finished goods. Flow charts show the flow of company operations and can show problems caused by unseen events.

c. Checklist

Is a list of questions about each part of the company.

Examples of risk classifications asked in the check list:

2. Risk Evaluation
The second stage of the risk management process is evaluating the impact of the risk on the company. Evaluation can be done in the form of quantitative analysis and qualitative analysis. Qualitative analysis is carried out if there is no quantitative analysis data, so the evaluation is carried out based on experience.
Quantitative analysis can only be done with statistics where there are adequate data/records. The difficulty that arises is that the data must be available immediately before the need for such data arises. Statistical data is needed for administration: how likely it is to happen again, the causes of the occurrence of the risk, so that control over the risk can be determined.

3. Risk Control
There are 2 aspects to consider:

a. Physical Control of Risk
There are 2 ways of physical control;

(1) Elimination
Loss prevention can be done by eliminating risk.

For example: Entrepreneurs who want to build a new factory must have risks. This risk can be eliminated by not building the new factory.

But in business, not all risks can be eliminated. For example like the factory above, although there is a risk of fire, but because the whole fate of the company depends on the new factory and therefore the factory must be built, it means that the risk to it cannot be completely eliminated. However, it can be minimized by building a factory in a place that is safe/not prone to fire.

(2) Minimization
There are 2 ways:

1. pre loss minimization
The impact of losses is anticipated and steps are taken to ensure that frequency/severity is kept to a minimum.

Examples: the use of seat belts in private cars, placement of guarding dangerous machines to anticipate worker accidents.

2. post loss minimization

Even after the risk has occurred, there are still steps that can be taken to minimize losses.

Example: saving goods in the event of a fire and other property that has a salvage value can be sold to reduce losses, sprinklers to minimize the impact of fire.

b. Financial Control of Risk

There are 2 ways of financial control:

(1) Retention
The purpose of insurance is to transfer unpredictable risk. However, if based on experience the level of risk can be estimated, the estimated amount can be anticipated and borne by yourself. The estimated loss can be paid from current income and charged as production costs. Alternatively, there is a separate fund set up to address this or to fully retain other risks.

Various ways of retention:

• full; at your own risk, do not involve other parties
• part; a kind of deductible treatment, where more than a certain amount is borne by another party/insurance.
• some that are not deductible; where certain risks are not insured, but other risks are insured
• captive; Establish your own insurance company with the aim of managing your own business risks

(2) Transfer

The second method is where the company transfers the impact of the loss to another organization/company. Examples are insurance or rental contracts where the owner transfers responsibility for the building to the tenant.

The tendency in the next few years is to retain risks that have high frequency, low severity and retain part of large losses with deductibles or captive insurance.