8 Non-Financing Risk Control Methods – Prevention
Author: Darius Delon, MBA FCIP CCIB RIMS-CRMP
President, Risk Management 101
We know to not use the risk avoidance technique unless we absolutely have to. What does preventing a risk really mean – frequency reduction.
We know, as a non-statistical rule of thumb, that a catastrophic loss risk will occur once, there will be 10 intermediate losses, 100 small losses, 1000 losses under the deductible/threshold (awareness) and 10,000 near misses (most times not recorded or even acknowledged as a near miss (luck)). This is not a statistically proven model – just an example to orient people on the near miss to catastrophic loss ratios. Prevention works to reduce the catastrophic loss by reducing the number of near misses. There is no guarantee that a catastrophic loss will not occur but you are trying to spread out the period of time in-between catastrophic losses. This does mean that you are trying to eliminate the 10,000 near misses, this becomes your key performance indicator, on an enterprise wide (hazard, operations, finance, reputation and strategy) incident management perspective. This concept already works well from a hazard perspective (insurable risks) and can work really well from an enterprise wide risk perspective if the data is being collected – which it is usually not. Lack of data collection is the problem for enterprise wide management of risk.
How does this translate into your operations? Let’s use a university off-site student travel example. A 1000 students will leave Canada from XYZ University and travel to various countries rated from a low, mid and high security (assuming you do not send students to extreme risk countries) risk perspective. If the students were to travel on their own, without any orientation, the above 10,000/1,000/100/10/1 ratio (inherent risk) will apply. If you send 1000 students per year – expect a large incident in 10 years. If you provide each student with country specific training (places to go and not go, cultural sensitivity training, vaccinations, etc.) you could expect your near misses to reduce to 5,000 – spreading out your next large incident to 20 years. If you were to restrict the locations that students were able to visit to just low and mid-level security risk countries you could expect to perhaps reduce your near misses by 50%, perhaps 2,500, with a corresponding spread to your catastrophic incident frequency to 40 years.
In effect, you are reducing the frequency of all the ratio types – catastrophic, intermediate, small, under threshold and near, by reducing the near miss frequency.
At any given time, you can have a large catastrophic incident, either today, tomorrow or in 40 years which is why we do not try to manage the catastrophic risk with prevention. We try to manage the catastrophic, intermediate, and small with reduction.
Tune in next week for #3 in the series of Non-Risk Financing Risk Control Methods – Reduction.
Disclaimer: Although the above article references events that have occurred in the past or are new to you, there are current policies/practices that can be learned and applied in todays market. Should you wish to explore any element of this article further, please contact Darius Delon, President of Risk Management 101 at 403-999-2724 for a free initial consultation.