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101
Rules of Risk Management
Note well...
Note well that these
are 101
Rules of Risk Management, not THE
101 Rules. They were pulled together by the late Tom Hallet when he was with
the late Frank B. Hall and Company. Our thanks to Tom and the group of
pioneer Risk Managers who collaborated in this effort.
Jim Gunther
General
1. An organization's
risk management program must be tailored to its overall objectives and should
change when those objectives change.
2. If you are in a
"safe" business (relatively immune from depression bankruptcy, or
shifts in product markets), your risk management program can be more
"risky" and less costly.
3. Don't risk more than
you can afford to lose.
4. Don't risk a lot for
a little.
5. Consider the odds of
an occurrence.
6. Have clearly defined
objectives that are consistent with corporate objectives.
7. The Risk Management
Department as a user of services should award business on the basis of
ability to perform.
8. For any significant
loss exposure, neither loss control nor loss financing alone is enough;
control and financing must be combined right proportion.
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Risk Identification and Measurement
9. Review financial
statements to help identify and measure risks.
10. Use flow charts to
identify sole source suppliers or other contingent business interruption
exposures.
11. To more fully
identify and assess risks, you must visit the plants and relate to
operational people.
12. A reliable database
is essential to estimate probability and severity.
13. Accurate and timely
risk information reduces risk, in and of itself.
14. The risk manager
should be involved in the purchase or design of any new operation to assure
that there are no built-in risk management problems.
15. Be certain
environmental risks are evaluated in mergers, acquisitions and joint
ventures.
16. Select hazardous
waste contractors on their risk control measures and their financial
stability or insurance protection.
17. Look for incidental
involvement in critical risk areas (i.e., aircraft and nuclear products,
medical malpractice, engineering design, etc.). RISK CONTROL
18. Risk Control works.
It is cost effective and helps control local operating costs.
19. The first (and
incontrovertible) reason for risk control is preservation of life.
20. A Property
Conservation program should be designed to protect corporate assets - NOT the
underwriter.
21. Be mindful that key
plants and sole source suppliers may need protection above and beyond normal
H.P.R. requirements.
22. Use the risk
control services of your broker and carrier as an extension of your corporate
program. Don't let them go off on a tangent.
23. Quality control
should NOT be a substitute for a full product liability control program.
Quality control only assures the product is made according to specifications,
whether good or bad.
24. Most of the
safety-related "standards" of governmental agencies should be
considered as minimum requirements.
25. Duplicate and
separately store valuable papers and back-up data processing media.
26. Avoid travel by
multiple executives in a single aircraft.
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Risk Financing
27. Risk Management
should focus on two separate zones of risk relative to the maximum dollar
loss the company can survive from a single occurrence:
a) below this
level-optimize the use of insurance relative to current cost.
b) above this level-transfer
risk (usually insurance) to maximum extent possible-cost effectiveness is not
a criterion in this zone; SURVIVAL is.
28. An entity with an
unlimited budget can benefit from adopting all risk management measures that
have benefits to the entity with an expected present value greater than the
expected present value of cost of those measures to that entity.
29. When, for budgetary
or practical reasons, an entity must chose between mutually exclusive risk
management measures, the entity should chose that measure which offers it the
greater excess of benefits over costs, when both benefits and costs are
expressed as expected present values.
30. Competitive bidding
which causes market disruption should be avoided.
31. Never depend solely
on someone else's insurance.
32. Retrospective
rating plans of more than one year hamper flexibility.
33. A tax advantage
should be considered a "PLUS"-not a principal reason for a risk
financing decision.
34. Risk taking
presents an opportunity for economic gain.
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Claims Management
35. The risk manager
should be notified immediately (within 24 hours) of any major loss or
potential loss.
36. Major liability
claims should be reviewed for adequacy of investigation and accuracy of the
reserve.
37. Be careful of local
plant involvement in property and liability claims. Local personnel may be
too defensive to properly review a major claim.
38. Request early
advance payments on large Property and Business Interruption losses.
39. Secure several
estimates or an appraisal of self-insured vehicle physical damage losses.
40. Aggressive claims
subrogation (insured and self-insured) reduces costs.
41. A claim and
disability management program directed toward getting the employee back to
work as soon as possible can save money even though the employee cannot do
all phases of the job.
42. Periodically audit
claims reserves of insurers and T.P.A.'s.
43. The best claim is a
closed claim.
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Employee Benefits
44. The provisions and
costs of Employee Benefit programs should be clearly and frequently
communicated to employees.
45. When installing a
new benefit plan, it is harder to reduce benefits than to improve them later
on.
46. A poor employee
benefit program can generate more employee relations problems than no plan at
all.
47. Employee
contributions, even small ones, can help you assess the real popularity of a
benefit plan.
48. Know the benefit
plans of the companies with whom you compete for labor.
49. Benefit consultants
and brokers are not efficient replacements for in-house staff functions.
50. Collective
bargaining of employee benefits should involve corporate benefit
professionals.
51. Legislation and
regulation are intensifying in the employee benefit field. Make your
company's opinions known to the government BEFORE legislation in enacted.
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PENSIONS
52. The ultimate cost
of any pension plan is equal to the benefits paid, plus the cost of
administration, less any investment earnings of the fund.
53. For the most part,
different actuarial methods and/or assumptions may alter the incidence of
cost, but seldom alter the ultimate level of cost.
54. Clearly identify
your corporate objectives with respect to your Retirement program. Recognize
that Retirement plans are long-term obligations that will span many
political, economic, and social environments.
55. Recognize that
retirement plans are long-term obligations that will span many political,
economic and social environments.
56. Identify the nature
and extent of pension liability prior to any acquisition or divestiture.
57. Establish formal
investment objectives with respect to your pension funds that define risk,
diversification, and absolute performance parameters.
58. Monitor the
performance of your pension fund in the context of your investment
objectives.
59. Identify and
monitor your corporate exposure as a result of participation in any
industry-wide Multi-Employer Pension Plans.
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International
60. Multinational
organizations should step up to their international risk management
responsibilities.
61. Establish a
worldwide risk and insurance management program; don't rely totally on a
Difference in Conditions approach.
62. A combination of
admitted and non-admitted insurance usually provides the best overall
international program.
63. Avoid the use of
long-term insurance policies overseas.
64. Be sensitive to and
don't underestimate nationalism when implementing a worldwide risk management
program.
65. Don't ignore local
objections to worldwide programs.
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Administrative
66. Establish a level
of authority via a management policy statement.
67. Prepare and universally
distribute a Corporate Risk Management Manual.
68. Set up realistic
annual objectives with your brokers, underwriters and vendors and measure
their accomplishments and results.
69. Verify the accuracy
of all relevant information you receive.
70. Read every
insurance policy carefully.
71. Keep program design
simple.
72. Consolidate-where
it makes sense to do so.
73. Develop record
retention procedures.
74. Keep inter-company
premium allocations confidential.
75. Establish
administrative procedures in writing.
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Technical
76. Insurance policy
provisions should be uniform as to named insured, notice and cancellation
clauses, territory, etc.
77. The
"notice" provision in all insurance policies should be modified to
mean notice to a specific individual.
78. Primary policies
with annual aggregates should have policy periods that coincide with excess
policies.
79. Joint loss
agreements should be obtained from Fire and Boiler & Machinery insurers.
80. Add "drive
other car" protection to your corporate auto insurance.
81. Eliminate
coinsurance clauses.
82. Know the
implications of and differences between "claims made" and "pay
on behalf of" liability contracts.
83. Risks accepted
under contracts are not necessarily covered under contractual liability
contracts.
84. Add employees as
insureds to liability contracts. Use discretionary language to avoid
defending hostile persons.
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Communication
85. All communication
providing or requesting information should be expressed in clear, objective
language, leaving no room for individual interpretation.
86. All communications
and relationships should be conducted with due consideration to proprietary
information.
87. Communicate
effectively up and down and avoid management surprises.
88. Don't TELL senior
management anything-ask them, counsel them, and inform them.
89. Communicate in
business language; avoid insurance jargon.
90. Obtain letters of
intent or interpretations regarding agreements (coverage or administrative)
which are outside of and/or in addition to actual insurance or service
contracts. Never rely on verbal agreements.
91. The immediate
supervisor to the risk management function should be educated in the
principles of risk management.
92. Communicate every
insurance exclusion and non-insurance implication to your management.
93. In competitive
bidding situations, advise each competitor that the first bid is the only bid
and stick to it.
94. Risk Managers
should meet with underwriters rather than relying totally on others for
market communications.
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Philosophical
95. The Risk Manager
(and his corporation) should avoid developing the reputation of a
"shopper" or "market burner". This reputation can be detrimental
to the corporation's best interests and the Risk Manager's credibility.
96. Determine your
personal level of risk aversion and temper intuitive judgments up or down
accordingly.
97. Program design will
always be a function of CURRENT practicalities tempered by management's level
of risk aversion.
98. Everyone is in
business to make a fair profit.
99. Long term, good
faith relationships are not obsolete.
100. Integrity is not
out of style.
101. Common sense is still
the single most important ingredient in risk management!
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Public domain...
To the best of my
knowledge this material is in the public domain and, as such, may be freely
distributed.
As I went to a fair
amount of effort to transcribe and format this material, I would appreciate
an acknowledgment
should you post it on your Web site.
Any comments,
additions, suggestions, etc. - please post comments on Riskweb.
Of course, I can be
contacted directly at JJG1@riskmanagementsearch.com.
Thanks,
Jim Gunther, Principle
Harvard Aimes Group
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