Systematic Risk Management Blog

Loss Prevention vs. Loss Financing

Posted by Vernon Grose on Mon, May 5, 2014 @ 08:05 AM

describe the imageExcerpted in part from MANAGING RISK: SYSTEMATIC LOSS PREVENTION FOR EXECUTIVES, by Dr. Vernon L. Grose .

There are three options for losses: ACCEPT them, PREVENT them, or BE REIMBURSED for them.  When you consider these three options together, several important conclusions emerge as follows:

1. Virtually all preventive work is partial; that, is it seldom eliminates the possibilty of a loss.
2. Reimbursement only partially repays the face value of loss.
3. Much more loss is accepted than is immediately obvious.
4. Reimbursement and prevention options are generally not exploited to their full potential.

Of the three alternatives for loss, REIMBURSEMENT alone requires concurrence of an outside party.  ACCEPTANCE and PREVENTION of losses are accomplished entirely by internal management decision.

ACCEPTANCE of loss is a universal option: it can be elected for every single loss.  Likewise, PREVENTION - if both total and partially effective actions are combined - is an option for any possible loss.  In contrast to these two, however, REIMBURSEMENT is not a viable option for all losses.

Not ALL losses can be reimbursed! 

•Deceased Personnel
•Depressed Morale of Workforce
•Damage to Public Reputation
•Imprisonment for Criminal Negligence
•Adverse Publicity

These losses are borne exclusively by the insured!

REIMBURSEMENT is a limited option for losses becausedescribe the image it is tied exclusively to economics.  Who and on what basis would anyone write an insurance policy to cover the five losses listed above?  How could these losses be expressed in dollars?

Consequently, PREVENTION is the key to effective risk management, yet the term "risk management" itself was first coined by the insurance industry, which then went about REIMBURSING rather than PREVENTING losses. 

Is your risk management effort focused more on REIMBURSEMENT, PREVENTION, or ACCEPTANCE of loss? How large is your RISK EXTRACTION - real losses that still occur without reimbursement, despite your control and financing efforts? Do you know your total cost of risk?describe the image

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Topics: systems-based risk management, enterprise risk management, systematic management of risk, systematic, systems, risk solutions, Risk Identification, insurance, manage risk, loss, Management buy-in, major risks, prevention