Managing Your Risk
What can voluntarily be done to reduce losses?

Six risk control techniques can help counties increase level of loss predictability, lower costs and keep employees healthy and on the job

By Michael Kelly
Property and Casualty Program Specialist

The most recent "Managing Your Risk" articles have dealt with methods employed for risk identification, risk analysis and forecasting. The third step in the risk management process is exploring the applicable alternatives for controlling the assumption of risk. In the insurance industry this is commonly called risk, or loss, control.

Simply stated, risk control is a conscious act or decision not to assume greater risk in an effort to reduce either the frequency or the severity of a loss. Successful risk control may allow a risk manager to have an increased level of loss predictability for both frequency and severity.

According to the Insurance Institute of America, there are six basic broad categories of technique used to control losses.

"Avoidance" is often not a viable alternative for local government operations. This is the decision to not engage in an activity or undertake an exposure in the first place. By completely avoiding an exposure, it becomes feasible to eliminate any real possibility of loss. Some of the operations in county government are a necessity, such as law enforcement, health department operations and social services, and the risks associated with these services cannot be avoided.

"Loss prevention" is the risk control technique that is designed to reduce the frequency of a particular type or class of loss. Installing high-grade deadbolt locks in conjunction with a good central station-monitored burglar alarm system is an example of loss prevention. It is not risk avoidance because a burglary of the premises is still possible, but the alarm system serves as a strong deterrent. Hence, such an action should instead be more aptly considered a loss prevention activity.

"Loss reduction" is a risk control technique that is employed with the goal of reducing the severity of a particular loss. An automatic sprinkler system installed in a building is an excellent example of a loss reduction program. It doesn't eliminate the possibility of a fire, but the chance of a fire being a severe loss is greatly reduced because the extinguisher system should help put the fire out before it causes too much damage. The techniques for loss reduction are generally further subdivided into pre-loss and post-loss measures.

Stated simply, pre-loss measures are designed to reduce the amount or extent of property damaged and the number of people injured from a single event before a loss occurs. An example might be an EMT using a hydraulic stretcher, which can aid in the process of elevating/transporting a patient and reduce the chance of a back injury for the EMT. Post-loss measures will typically focus on emergency procedures, the selection of a legal course of action, salvage of damaged property, etc., with a mindset of halting or reducing the spread or effect of a loss that has already occurred. Moving an organization's operation to a new location following a fire loss, thereby allowing uninterrupted service, is an example of a post-loss reduction measure.

"Separation" is a risk control technique that spreads the location of county assets or operations among more than one single building, with all such locations being utilized on a regular basis. This way, if a catastrophic fire were to destroy a building, then the contents in the other buildings would be spared. If all of an operation's assets are in the same building and it gets destroyed by fire, then everything is lost.

The goal is to reduce the level of possible loss severity for any one given location. However, the downside to separation is with more locations the chances of loss frequency increases. Having multiple operational premises equals more locations where a loss can occur.

"Duplication" is often employed as a risk control technique that employs backups, copies and duplicates of properties held in reserve in case they are needed. Examples are computer data backups, a hard-copy second set of records, and duplicate manufacturing machinery parts – even spare keys. The difference between separation and duplication is that the assets being duplicated are held in reserve and are not used until needed, whereas separation simply spreads out an organization's operations and all assets are still utilized on a daily, reoccurring basis.

"Diversification" is a method of hedging and the spreading of loss exposures over a myriad of projects, products, areas or markets. For local government operations, this is more difficult to accomplish than in the private sector and often appears more applicable in the case of business type risk, i.e. loss of product market share, variance in currency exchange, investment of capital and multiple business operations for the purpose of generating diversification of revenue streams.

All six risk control techniques support the basic goals for local government to provide a solid continuation of public services while promoting life safety and spending as few taxpayer dollars as possible.

Risk control is an invaluable service that should be provided by and through your casualty insurance carrier. If you are a member of the NCACC Liability & Property or Workers' Compensation Risk Management Pools, I encourage you to take advantage of the capability of our professional risk control staff. Through sound loss control efforts, you can provide employee training, improve productivity through increased staff morale stemming from less lost time hours, save money normally budgeted for deductibles/self insured retentions, and of course lower your total annual insurance contributions. All can be accomplished at no additional cost to you as a member.

Give it some thought. It will pay substantial dividends in the long run.

NCACC Property and Casualty Program Specialist Michael Kelly writes a regular column on risk management for CountyLines. With more than 32 years of risk management/insurance experience, he holds the Associate in Risk Management, Associate in Risk Management for Public Entities, Certified Risk Managers and Certified Insurance Counselors professional designations. Archived versions of the column can be found online at www.ncacc.org/managingyourrisk.html.