The Elements Of A Risk Management Program - Part III of III

Our last two articles dealt with the presentation of the aspects of risk control and a brief discussion of the considerations present when developing a risk management program for your county. Due to the confines of space, the material was presented in a format that was intended to encourage formulation of initial ideas for the development of a risk control program.

This article is the fourth and final in the series centering on the aspects of risk control techniques and their applications. In this final installment, we will address the techniques of avoidance, separation, combination and transfer.

AVOIDANCE

Avoidance is a method utilized to control association with persons, property or activities likely to create a loss. A county may follow two methods of avoidance:

1. Refusal to assume responsibility, even for a short time

or;

2. Discontinuing association with a risk undertaken earlier, or abandonment.

The most popular form utilized is the first, strict avoidance of the risk entirely. For example, a county that wants to avoid the potential for automobile losses, never acquires an interest in a fleet of vehicles. This example is extreme and would not be practical, however is illustrates strict avoidance to pure risk. However, it may be selectively utilized if a particular automobile exposure is to avoided. By contracting, you avoid the potential for loss from operations you have decided to avoid. For example, if a county is concerned about the purchase and operation of a bus, it may choose to hire or contract this operation with a bus service, while maintain normal operation of it's fleet.

Abandonment, the less commonly used technique, involves discontinuing a service or operation after it has started. For example, consider a county that has been using a underground fuel storage tank and recent soil testing has detected enough contamination to signal concern that the tank is leaking. The county avoids further contamination by removing it from the ground and abandoning this method of fuel storage.

A county would be faced with several considerations when looking to risk avoidance as a method of handling risk. First, a county can be certain that it will not have the potential losses that the avoided risk may generate, however, they lose any benefits derived from the person, property or activity that is avoided. Next, avoidance may not be possible or practical. These factors must all be weighed when considering this technique.

SEPARATION

The third method of risk control involves separation of exposures to loss, rather than concentrating them all at one location or in one operation. This technique is most commonly practiced in conjunction with property type exposures. For example, a highway department may consider not storing all valuable equipment in one location. If this is not possible or practical, consideration may be given to spreading or parking the equipment in a manner that will not expose a high concentration of equipment to one occurrence, such a windstorm or fire. This would have the desired effect, but with a lesser degree of success than complete separation.

This technique is founded on this principle, that by increasing the number of individual units, you will lessen the likelihood of exposure to a catastrophic loss.

COMBINATION

The technique of combination can be illustrated by the formation of the Wisconsin County Mutual Insurance Corporation. Using this technique, you combine the exposure units which makes the loss experience more predictable. Combination brings a larger base of exposure units under control, with the desireable benefit being, that in volume, more exposure units improves the ability to predict losses for the group and lessen the impact of one single loss. Thus, positively effecting the loss experience and cost to each individual unit. For example, one county would be more effected by a single loss if it stood alone versus having that same loss absorbed by a larger group of units. This illustrates the use of combination as an effective means of controlling risk and associated costs.

TRANSFER

The last technique to be addressed involves two methods for the effective transfer of risk. First, the exposure for potential loss may be transferred to other entities or persons. For example, the Department of Natural Resources (DNR) has a tract of land that may be difficult to manage and maintain. County A has a desire to develop a nature area for the benefit of children in the county. The DNR, recognizing that without proper management, this property presents exposure to loss, transfers the management and development operations to County A and requires that they are "held harmless." This in effect transfers the exposure to loss, or risk, to County A. Many of these risk transfers involve risk financing transfers, such as the above mentioned example. Risk control transfers protect the county against the legal responsibility for acts of others. Usually, this can be accomplished by lease agreements, construction contracts and contracts of sale where a provision has been inserted that states the county explicitly will not accept the risk of the other party, but which in the absence of the contract, the law may otherwise allow the contracted party to transfer to the county.

Second, property or activities associated with a risk may be transferred to some other entity or persons. For example, County A decides to purchase and develop a new site for their fairgrounds, and decides to sell the fairgrounds to a local civic group for development of a municipal park. With the sale of the fairgrounds, County A has transferred all of the risks associated with ownership to the new owners.

The Wisconsin County Mutual Insurance Corporation's Loss Prevention and Safety Manual developed for use by it's members, should provide you with examples of program design and recommended procedures to follow when making the necessary decisions relative to your specific risk control program.

As mentioned in the previous articles, should this article raises any questions concerning the risk management program in your county, please direct your comments to your agent or give me a call.