Risk Management Alternatives Loss Control Techniques Chapt 5

Avoidance
A risk control technique that involves ceasing or never undertaking an activity so that the possibility of a future loss occurring from that activity is eliminated. Most importantly, frequency of loss is reduced to zero. However, you can not avoid all risks.
Loss Prevention
A risk control technique that reduces the frequency of a particular loss.
Loss Reduction
A risk control technique that reduces the severity of a particular loss.
Separation
A risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss
Duplication
A risk control technique that uses back ups, spares, or copies of critical property, information, or capabilities and keeps them in reserve.
Diversification
A risk control technique that spreads loss exposures over numerous projects, products, markets, or regions.
Loss Prevention
Reduces frequency. Interrupts or breaks the chain of events prior that take place prior to a loss.
Goals of Risk Control
1. lower frequency of the loss
2. lower severity of the loss
3. improve the predictability of losses
4. lower variability in losses
5. lower Coefficient of Variation
Pro-active Avoidance
Never to engaged in the activity that causes a loss.
Frequency is reduced to zero
Reactive Avoidance
disengaged in an activity causing a loss.
Frequency is reduced to zero, aims to avert an ALREADY EXISTING loss exposure by stopping a current or ongoing activity.
Disadvantages of Avoidance
there is an opportunity cost. Firm can be avoiding profit. Also other risks may arise due to avoiding another risk.
Example: If a firm decides to eliminate their trucks and outsource their transportation department they are now faced with a different set of liability risk.
When should a firm practice Avoidance?
When the cost exceeds the benefit.
Example: when a hospital eliminates the maternity ward or emergency room.
Loss Control Elements
1. Loss Prevention
2. Loss Reduction
Loss Control
Attempts to reduce frequency or probability of a loss
heinrich domino theory
A theory of accident causation that applies techniques to reduce loss.
Pre-loss Loss Reduction Activities
1. fire surpression equipment
2. exit signs
3. fire doors
4. fire extinguishers
5. fire doors
Remember to recognize the peril first then identify the activities to reduce the severity of the loss.
Post Loss, Loss Reduction Activities
1. rehabilitation of workers
2. product recall
3. salvage operation
4. legal defense
5. Crises Management
Separation of Exposure Units
separate the exposure units used in daily business activities, so that ONE peril will not affect all units
Risk Control
1. Avoidance
2. Loss Prevention
3. Loss Reduction
4. Separation
5. Duplication
6. Diversification
Reactive Avoidance
Avoidance may , seeks to eliminate a loss exposure that ALREADY exists – stopping or refraining from engaging in the activity
Legacy cost
may avoid future losses by avoidance might not avoid costs from the past