apins consultants pvt. ltd. “ we care for your cover” a presentation on risk audit
TRANSCRIPT
Apins Consultants Pvt. Ltd.www.apins.co
“We Care for Your Cover”
A PRESENTATION ON
Risk Audit
What is Risk Audit ?The risk audit is the most effective tool for
assessing the risk associated with an organisation and plan for a proper risk management.
It starts with a logical and systematic examination of the process/operation of any industrial unit to identify the potential hazards associated, which may represent risks to personnel or machineries or prevent the smooth and efficient operation of the unit.
It can also help in implementing the most effective risk control measures (like fire prevention, flood prevention etc.) And facilities that help to reduce the occurrence frequency of the unexpected events.
Need for a Risk Audit..
Fire & similar perils cause huge losses to property and affects the production efficiency of industrial houses in the world every year.
The above losses are coupled with loss of market, loss of good will, loss of data, damage to reputation etc. Which pose severe threats to the survival of an organisation in the world of cut-throat competition.
As per study, the causes of these losses are : 1. Deliberate act 2. People not alert/aware of the hazards and 3. Carelessness/negligence of the people.
These losses can be contained by systematic identification of the hazards, evaluating their impact and review the protection measures.
Need for a Risk Audit..
It is always better to identify the hazards and improve the risk than to wait for an accident to occur.
“Insurance is like a shock absorber of a car..It can smoothen the ride but can not improve the quality of road…”
The risk audit improves the risk and explore all possible risk management techniques starting from self pool to commercial insurance.
Approach to Risk Audit..
The traditional method of safety audits mainly inspect out problems and offer short-term solutions. This is not complete unless it covers various aspects which are related to the design, layout, operation, maintenance and housekeeping and claim history etc. And offer a total risk management solution at economic cost.
A team of experts with the understanding of the basic safety principles, knowledge relating to the particular work place, building & electrical regulations and experience in insurance & risk management shall be deployed to carry out the risk audit.
In addition to identifying each hazard associated to an item through risk audit, it is also important to estimate its severity , on a scale of 1 (high) to 4 (low), and likelihood, on a scale of 1 (high) to 4 (low) for the item under audit.
Approach to Risk Audit..For an item/equipment/process block under audit
SEVERITY (S): Severity analysis..
SEVERITY
SIGNIFICANCE
1 HIGH – Fatality /serious injury hazard or hazard leading to loss of > 6 months production or loss greater than Rs 10 Cr.
2 MEDIUM HIGH – Injury hazard or hazard leading to loss of 1-6 months production or loss between Rs 5 Cr to Rs 10 Cr.
3 MEDIUM LOW – Minor injury hazard or hazard leading to loss of 1-4 weeks production or loss between Rs 1 Cr to Rs 5 Cr.
4 LOW – No injury or hazard leading to loss of < 1 week production or loss less than Rs 1 Cr.
Approach to Risk Audit..For an item/equipment/process block under audit
LIKELIHOOD (L) :
LIKELIHOOD
SIGNIFICANCE
1 HIGH – Hazard expected more than once per year.
2 MEDIUM HIGH – Hazard expected more than once in 5 years in the plant.
3 MEDIUM LOW – Hazard not expected more than once in 5 years in the plant.
4 LOW – Hazard not expected at all in the plant life.
Risk Ranking (R) : For an item/equipment/process block under audit
SEVERITY (S)
RISK MATRIX
1 2 3 4
1 D D C A
2 D C B A
3 C B A A
4 B A A A
L
IKE
LIH
OO
D (
L)
Risk Ranking (R) :For an item/equipment/process block under audit
Ranking (R) Significance
A Acceptable risk level
B Almost acceptable risk level. Acceptable if suitably controlled by management. Should check that suitable procedures and/or control systems are in place.
C Undesirable risk level. Must be reduced to level B at the most by engineering or management control.
D Unacceptable risk level. Must be reduced to level B at the most by engineering or management control.
WORKSHEET for Risk Ranking :
For an item/equipment/process block under audit
Activity
Likely Accident/Deviation
Possible Cause
Consequence
Action Required
S L R
APPROACH TO RISK AUDIT ...
Once an exposure to risk has been identified, we have three options :-
Tolerate it .
Lower the potential cost by implementing measures costing less than the total loss in Rs / year.
Lower the likelihood of loss occurrence by implementing measures costing less than the exposure.
APPROACH TO RISK AUDIT ...
It is required to quantify both the potential cost and the likelihood of occurrence, to make an informed selection of any of the three options.
Insurance is not a fourth option, it is a technique of risk financing, as such, it is a matter to be considered after the selection of the other options.
Based on the risk audit, the alternative to insurance, like risk retention or self-insurance (fully or limited) by creating a separated fund can be also be considered.
THE APINS METHODOLOGY OF CONDUCTING RISK AUDIT - INSPECTION.
We at apins have designed some standard formats which shall be filled up by our team members at the work place based on the close observation and examination of various features associated with the operation, construction, layout, safety, etc.
Based on the informations collected at the site, our team will analyse the risk, the consequences and all possible measures to reduce the likelihood and severity of accidents which can hinder the smooth functioning of the plant.
RISK AUDIT FLOW CHART
The risk audit has a systematic approach which follows a flow-chart of activities.
The approach differs with the type of risk, size and occupancy etc
1. PRE-AUDIT DATA COLLECTION
APINS RISK AUDIT FLOWCHART (for Large Industrial Units)
2. SITE VISIT, STUDY THE EXISTING FACILITIES , LAYOUT & RECORD THE FINDINGS
3. IDENTIFY ALL SIGNIFICANT HAZARDS
4. IDENTIFY THE PEOPLE WHO ARE AT RISK
5. CONTROL ANALYSIS : EVALUATING/TESTING WHETHER THE EXISTING CONTROL MEASURES ARE SUFFICIENT OR NOT.
EXAMINE THE EXISTING INSURANCE POLICY COVERAGE/CLAUSES AND RESEARCH THE PAST LOSSES IN THE UNIT.
VALUATION OF ASSETS (BLDG.,P&M,FFF ETC.)
↓
↓
↓
↓
←→
↓
6. LIKELIHOOD DETERMINATION (LIKELIHOOD RATING)
7. IMPACT/SEVERITY ANALYSIS (SEVERITY RATING)
8. RISK DETERMINATION : RISK RANKING BASED ON 6 & 7 AND PML ASSESSMENT
9. REDUCE RISK : RECOMMEND ADDITIONAL CONTROL MEASURES, IF REQUIRED
10. ASSESS RESIDUAL RISK : RISK RANKING AFTER IMPLEMENTATION OF 9.
↓
↓
↓
↓
↓
↓
11. IS RESIDUAL RISK ACCEPTABLE ?IF NO – GO TO NO. 3IF YES – GO TO NO. 12
12. RISK ACCOUNTING & FINANCING : RESEARCH ON INSURABLE RISK AND TRANSFERABLE RISK AND POSSIBILITIES OF CREATION OF A RESERVE FOR RETAINABLE RISK ETC.
↓
↓
13. RESULTS DOCUMENTATION: RISK AUDIT REPORT WITH ALL RECOMMENDATIONS ON RISK MANAGEMENT IS COMPLETE.
↓
1. PRE-AUDIT DATA COLLECTION
APINS RISK AUDIT FLOWCHART (for MSMEs)
2. SITE VISIT, STUDY THE EXISTING FACILITIES, LAYOUT & RECORD THE FINDINGS
5. CONTROL ANALYSIS : EVALUATING/TESTING WHETHER THE EXISTING CONTROL MEASURES ARE SUFFICIENT OR NOT.
4. EXAMINE THE EXISTING INSURANCE POLICIES/COVERAGE ETC.
3. VALUATION OF ASSETS (BLDG.,P&M,FFF ETC.)
↓
↓
↓
↓
↓
6. PROBABLE MAXIMUM LOSS ASSESSMENT
7. RISK IMPROVEMENT : RECOMMEND ADDITIONAL CONTROL MEASURES, IF REQUIRED
8. RESULTS DOCUMENTATION: RISK AUDIT REPORT WITH ALL RECOMMENDATIONS ON RISK MANAGEMENT IS COMPLETE.
↓
↓
↓
Alternatives to CommercialInsurance
There are various alternative options available
which in combination with Commercial Insurance make a Profitable Risk Management Programme.
The most common alternative used by various Private & Public Sector organisations in the world is “Self Insurance” i.e, Creation of a “Risk Fund”.
Self-Insurance Program. It is a creative risk management method where
initial predictable risk losses are retained and self-insured, i.e, a first layer of protection.
A stop-loss commercial insurance policy is also purchased along side this. The policy provider will then cover the losses above the self-insurance loss fund limit.
The cost of the commercial insurance cover in this situation will become less expensive over time, as there is a deductible layer (i.e, first layer) available.
Insurance with Self-Insurance.
Self-Insurance Program, doesn’t mean having no insurance. It is a combination of commercial and self-insurance which provide the best cover for any self-insurer.
Self-Insurance Program.
A Bar Diagram in the next slide will show the Self-Insurance Program of an Industrial Unit.
Loss
Cla
ims
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Self-I
nsu
rance
La
yer
Commercial Insurance
Self Retention Capacity
Years
Self-Insurance arrangement..
Claims Paid
Expected RiskFund
Insurer Reimburses Excess Claims
Surplus Fund for investment
Insured’s contribution towards the Risk Fund
Self-Insurance Program..
For an effective Self Insurance Program : Risk Analysis & Assessment is required.
For this, a proper Risk Audit should to be carried out and a Risk Profile to be prepared based on the Audit Report.
contd.The factors in the Risk Profile are :
Risk size and composition details. Range and type of operations.Plant & Process Layout. Operator training and requirements.Maintenance and servicing. Loss History (PD+BI) with findings.Environmental conditions, if considerable. Loss Prevention & Minimisation
measures.PML (Probable Maximum Loss) Assessment.
Selection of Self Retention Level
Any individual/insured knows more about their own risk level than does the insurer.
Based on the Risk Audit observations and findings, any Corporate Management can take an informed decision on the best combination of Insurance & Self Insurance.
Creation & Control of Self-Insurance or Risk Fund
Creation & Control of Self-Insurance or Risk Fund Consider eliminating some of the insurance
policies for which you are able to pay for the risk yourself. For instance, full coverage of Motor Insurance. If you own several number of cars or vans etc., you can opt for only Third-Party Cover (mandatory as per MV Act 1988) and retain the Own-Damage portion with self-insurance.
Make insurance deductibles (i.e, excess) larger, ie, self-insuring for the amount up to the deductible, which will enable you to immediately lower your premium payment.
Creation & Control of Self-Insurance or Risk Fund
Judge tentatively, what should be the size of Risk Fund/Self-Insurance Fund...
It is suggested to fix 1% of last year turnover or projected turnover for next year, which ever is higher plus 10% to be deposited into the Risk Fund.
The deduction towards Risk Fund may be subject to minimum of applicable fire insurance tariff rate on maximum value at risk on RIV basis.
Further increase the fund by 20% if Probable Maximum Loss (PML) is more than 40% of Total Sum-Insured.
Creation & Control of Self-Insurance or Risk Fund
Adopt any method suggested in the last slide.
Fund should be created at the time of opening of accounts for next year or on closing of last year accounts so that it is reflected in the annual accounts statement, i.e, it will go with companies financial year.
Audit of the account from time to time on utilization of the Risk Fund is required. The unutilised balance fund on closing of accounts will be carry forward to the next financial year.
Creation & Control of Self-Insurance or Risk FundFund should be under control of some
dedicated members of management of the company who can take decision on disbursement of fund.
Company will act as custodian of fund and keep rights to invest the fund for its growth
A proper Investment Strategy should be worked out looking to the exposure, liquidity & yield. Major portion of the investment should be short-term investment that can be quickly turned into useable cash without a large loss in value.
Creation & Control of Self-Insurance or Risk Fund
Some suggestive Investment Guidelines for the Risk Fund :
The Risk Fund should not be used in the insured’s business. A portion of the long-term investment return can be utilised in the business, if, decided by the management depending on the exposure & control measures.
Creation & Control of Self-Insurance or Risk Fund
The primary objective of the investment is to provide the enterprise a maximum level of return subject to a low probability of negative returns over rolling three year periods. The secondary investment objective is to maximise long-term capital growth within acceptable risk levels.
Creation & Control of Self-Insurance or Risk FundA Portfolio composition for the Risk Fund : Item Investment
Policy Remarks
Non-profit Bank Account
50% 50% of the fund should be available anytime to meet the contingencies
Fixed Income Portfolio
40% A portfolio of fixed income securities.
Equity Portfolio 10% This is to provide a total return that will provide for a growth in principal.
Creation & Control of Self-Insurance or Risk Fund
The performance will have to be monitored and evaluated over rolling 3-5 years period against a benchmark. If required the investment policy should be changed keeping in mind the exposure and liquidity requirements.
The ROI (Return on Investment) should form part of the Risk Fund. As more fund means more retention capacity. At present there is no tax benefit on Risk Fund or self-insurance fund, but the investment return will compensate this outgo.
When and Where the Fund should be used!!
Expenses
When and Where Fund should be usedCost of losses not covered by the insurers, i.e,
retained as self-insured. – This cost also includes cost towards depreciation, betterment etc.
Cost for transfer of risk to the insurers – i.e, Premium for Stop-Loss cover.
All expanses for safety, training and improvement factors for controlling & minimizing the losses and their maintenance - “Less claims means more fund”.
When and Where Fund should be use
All payments for consultancy for risk management and investment portfolio management, if outsourced.
Other Expenses towards management of risk like, valuation, inspection, audit etc.
In a nut-shell,The benefits of this Arrangement are ..
The Business fund is not interrupted in case of any event of loss.
Need not worry for the delays in settlement of claims by insurance companies.
No worry for promoters and share holders at least from physical risk.
A Presentation on the Risk Accounting over a period of Time..
Period
Fu
nd
Risk Fund
Cost on Insurance
Minimum cost on Stop-Loss cover
Thank You .. For your patience
We care for your cover..