Introduction of Risk Control

CHAPTER 9 :CORPORATE RISK CONTROLPresenter :Nurul Syafiqah binti Mad JamilSiti Nurbaini binti KamaruzamanNur Afiqah binti Hasan GannyIntroduction of Risk ControlObjectivesTo minimize the total cost of risk of an organizationTo ensure long-term economic survival of the organization after occurrence of a major loss event

Cost of riskCost of losses that occurred and are retainedCost of financing lossCost of implementing risk control measuresTypes Of Risk Control

Risk AvoidanceDecision or action taken by an organization or individual not to create a particular loss exposure or to eliminate an existing loss exposure.

Considered a negative response to risk.

It will be used only when :The risk has a catastrophic loss potential arising from high frequency of occurrence that may threaten the financial stability of the company,The risk cannot be reduced or transferred.

Risk ReductionRisk control measures that minimize risk.Includes two approaches ;Loss preventionLoss controlRisk Reduction (cont)LOSS PREVENTION

Reduces the probability or the frequency of a particular loss.

Certain loss prevention measures only reduce the probability of a loss but do not reduce the severity.

Loss prevention measure is an action taken or a physical safeguard installed before a loss occurs to stop the chain of events that may lead to a loss.Risk Reduction (cont)LOSS CONTROLTo reduce or minimize the size of losses that do occur.Implemented before the loss event occurs and will become operational before, during or after the loss event has taken place.Loss control measures can be divided into two categories :

Pre-loss measuresPost-loss measuresOperating before the loss occurs.Applied after the loss occurs.Specialized Loss Control MeasuresSegregation of exposure unitsSeparationThis technique aims to reduce the value of the organizations assets expose to risk by dividing the assets onto two or more separate units.Examples (refer to page 154)

DuplicationInvolves the creation of additional backups or spare copies of critical assets of the organization with the objective of reducing the adverse consequences if the operating asset is damaged or destroyed in an accident.

SalvageImmediate action taken by the organization to preserve the value of the asset that has been damaged in an accident.Contingency PlanningProvides coordinated, effective responses through planning and organizing the companys resources and activities immediately before, during and after the crisis.Its goal is to preserve the organizational resources (assets and people) during the crisis for the fullest feasible long-term recovery.It acts as the risk control of last resort or the safety net of the risk control programme.Two key components of effective contingency planning :Crisis management planningBusiness recovery planning/business continuity management (BCM)Crisis Management PlanningIs defined as the planning, organizing and controlling of the companys assets and activities in the critical period immediately before, during and after an actual or impending major loss event to reduce the loss of resources essential to the companys eventual full recovery.Main goal : to ensure the corporation will survive any foreseeable major accidental losses.Crisis Management Planning (cont)Reasons for developing a crisis management planTo mitigate the impact of the lossTo contain the lossTo response to and control the situation effectivelyTo resolve or recover from the crisis situation

A crisis situation involves:A threat to resources and peopleA loss of controlVisible and/or invisible effects on people, resources and organizationsCrisis Management Planning (cont)Benefits of Crisis Management PlanningKey Elements of A Good Crisis Management PlanBusiness Recovery Planning (Business Continuity Management)Business Recovery Plan will be implemented to allow the organization to plot its path back to normal operations as quickly and efficiently as possible.

The main task of the recovery is to provide alternatives to counter the disruption.

A business recovery plan is prepared based on the inputs from various departments of the organization.Contractual Transfer for Risk ControlFrequently used by organizations to shift their legal responsibility for a loss or responsibility for financial consequences of a loss to another organization.It can be divided into two categories:

Contractual transfer for risk controlContractual transfer for risk financing Is a mechanism whereby an organization transfers the legal responsibility for a loss or responsibility for financial consequences of a loss to another organization. An organization makes a promise to pay for the loss incurred by another organization even though it is not legally responsible for the loss.Contractual Transfer to Risk Control (Cont)Under an indemnity agreement, an organization (transferee) agrees to pay (indemnify) any loss incurred by another organization (transferor). A hold-harmless agreement requires one organization (transferee) to pay loss to a third party on behalf of another organization (transferor).There are three uncertainties highlighted:Inability of the transferee to discharge its obligation due to bankruptcy and no insurance has been arranged to finance such payment.There is ambiguity in the wording of the agreement and the transferee has disputed its obligation to pay any loss incurred.The agreement may be declared by the court as unenforceable due to unfair contractual terms or rendered void on grounds of public policy.Importance of Risk ControlSignificant in controlling risk with low probability Involve substantial investment of cash resources will be subject to cost benefit analysisApplication of marginal cost-marginal analysis to risk control is complicated by following factors:The benefit generated from risk control are difficult to measure as it involve measuring something that does not happen in the futureTime difference between benefits generated and the cost incurred Importance of Risk Control (Example)RMInitial cash outflowCost of sprinkler system(8,000,000)Annual net cash flowAnnual insurance premium savingsAnnual maintenance costReduction in uninsured loss (cost)1,300,000

(300,000)410,000Annual net cash inflow1,410,000Decision: Company Y should install the sprinkler system as the present value of the net cash flow is positive. The present value of an annuity of RM1 at 10% for a period of 10 years is 6.145.Present value of positive cash inflows is RM1,410,000 X 6.145=RM8,664,450Present value of net cash flow=RM8,664,450 RM8,000,000RM664,450 (positive value)Role of Government in Risk ControlIntroduce safety acts and regulations Fire Safety Act 1998Occupational Safety and Health Act 1994

Theories of Accidental Causation and ControlLoss Prevention and Control StrategiesRISK CONTROL MEASURES FOR SPECIFIC EVENTA well designed control programmed should include; Personnel Liability loss controlProperty protectionSecurityObjective Provide appropriate control technique of specialized risk controlRISK CONTROL MEASURES FOR SPECIFIC EVENTFIREPRODUCT LIABILITYTHEFTEMBEZZLEMENT AND FRAUD

FireCause of fire :Sources of ignition energy Human failings carelessness, malicious intent, failure to comply with safety rules Three main causes industrial fires;Misuse electrical equipmentBurning and spark generation equipmentCigarette lightFire (Cont)Principles of fire risk prevention & controlRelating to controlling/eliminating 1 or more 3 element of fire triangleFire prevention measures Control heat Loss control measures extinguish fire (water or other extinguishing agents)

Fire loss prevention and control4 areas; Structural fire protection Fire protection using fire barriersElimination of source of ignition Identify and remove heat from fuelDetection of outbreak of a fire Use alarms to detect and extinguishFire extinguishment Fire extinguish equipment -fire suppression sprinkler (water) Industrial company;Type of building constructions can withstand fire hazardsFire resistance walls fire will not spreadControl sources of ignition monitor use of flammable liquidDesign fire detection to alert premises

Product LiabilityLegal liability for defective productFaulty product be held liable for bodily injured or property damageArises one 3 basis; Negligence Breach of warranty Strict liabilitySteps to manage product liability riskProduct design include current safety measuresImplementation of quality control production processDocumentation of quality control measures liability claims in courtReview packaging and labeling ensure quality and safety requirement.Review and revised supplier contract Contingency plan recall defective product and respond quicklyTheft RiskSecurity Protect assets from crimeTheft Unlawful taking property belongs to othersLoss prevention against burglary; Physical protection for premises in order to delay access Installation of burglar alarm systems or the use of guard or security patrols Use of automatic camera or closed circuit television systems Design Various loss prevention procedures to reduce the likelihood and severity of theft losses.Embezzlement and fraud of employees (E&F) Condition leading to (E&F); Negligence Lack of controlMeasures to control (E&F); Accounting control internal audit Access Control limiting access Personal Screening Background check Separation of duties Proper segregation based on function

Effective segregation condition;Function No total control over every phase E.g.; Inventory records VS Physical checks

Work FlowLink process without duplication2nd person check 1st person work

Authorization User of assets different from their custodyE.g.; Inventory clerk release material upon authorization from department head

KeeperRecord keeping & Bookkeeping separate from Handling & custodian of assets

Q & A SESSION