Identifying Loss Exposures
To handle loss exposures, a risk manager must first identify them. Identifying Loss Exposures involves developing a complete list of loss exposures and possible accidental losses that can affect a particular household or organization.
The risk manager can start with a physical inspection of the premises and then use other tools that aid in the identification process, such as loss exposure surveys and flow charts.
Physical Inspection
The most straight forward method of identifying loss exposure is a physical inspection of all locations, operations, maintenance routines, safety practices, work processes and other activities.
Loss Exposure Survey
A loss exposure survey is a risk management tool in the form of a checklist or questionnaire listing potential loss exposures that a household or an organization might face.
A loss exposure survey can be a valuable tool to help the risk manager identify the organization’s loss exposures.
The survey’s major weakness is that it might omit an important exposure, especially if the organization has unique operations not included on a standard survey form. Hence, the survey must be used as a guide to develop a comprehensive picture of the organization’s operations and loss exposures.
Flowchart
A flowchart is a diagram that depicts the flow of a particular operation or set of related operations within an organization.
Risk managers can use a flow chart to identify specific types of loss exposures. A flowchart complements the loss exposure survey by providing a diagram of loss exposures from certain operations. Also it forces the risk manager to examine each and every aspect of the operation in detail.
Analyzing Loss Exposures
Analyzing loss exposures involves determining the financial effect of a potential loss on the household or organization. To determine the financial effect of losses, a risk manager needs to measure both the likely frequency and the severity of the loss.
Loss Frequency
Loss frequency is a term used to indicate how often losses occur or are expected to occur. Loss frequency is used to predict the likelihood of similar losses in the future.
Frequent losses include abrasions and minor lacerations of employees at a manufacturing plant, minor auto accidents with a large fleet of autos, and spoilage of produce at a supermarket. Other losses such as those caused by earthquakes, tornadoes, and hurricanes, occur much less frequently.
Accurate measurement of loss frequency is important because the proper treatment of the loss exposure often depends on how frequently the loss is expected to occur.
Loss Severity
Loss severity is a term that refers to the dollar amount of damages that results or might result from loss exposures. Loss severity is used to predict how costly future losses are likely to be.
Properly estimating loss severity is essential in order to treat the exposure to loss. This also enables on adopting of type of risk management technique.
Most property loss has a finite value and hence it is easy to estimate loss severity of a property loss than a liability loss.
Managing Loss Exposures: Risk Management
