CHAPTER 9 :

CORPORATE RISK CONTROL

Presenter :

Nurul Syafiqah binti Mad Jamil

Siti Nurbaini binti Kamaruzaman

Nur Afiqah binti Hasan Ganny

INTRODUCTION OF RISK
CONTROL
Objectives
To minimize the total cost of risk of an
organization
To ensure long-term economic survival of the
organization after occurrence of a major loss
event
Cost of risk
Cost of losses that occurred and are retained
Cost of financing loss
Cost of implementing risk control measures

Types Of Risk Control

Risk
Avoidance

Contractual
transfer for
risk control

Risk
Reduction

Segregation
of exposure
units

RISK AVOIDANCE
Decision

or action taken by an organization or individual not to

create a particular loss exposure or to eliminate an existing loss
exposure.

Considered

It

a negative response to risk.

will be used only when :

1.

The risk has a catastrophic loss potential arising from high

frequency of occurrence that may threaten the financial
stability of the company,

2.

The risk cannot be reduced or transferred.

RISK REDUCTION
Risk control measures that minimize risk.
Includes two approaches ;

Loss
prevention

Loss
control

RISK 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 CONTROL

To 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 measures

Post-loss measures

Operating before the

Applied after the loss

loss occurs.

occurs.

SPECIALIZED LOSS
CONTROL MEASURES
Segregation of exposure units

Separation

This 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)

Duplication

Involves 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.
Salvage

Immediate action taken by the organization to preserve the value

of the asset that has been damaged in an accident.

CONTINGENCY PLANNING
Provides 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 :
1.
Crisis management planning
2.
Business recovery planning/business continuity
management (BCM)

CRISIS MANAGEMENT
PLANNING
Is 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 plan
1. To mitigate the impact of the loss
2. To contain the loss
3. To response to and control the situation effectively
4. To resolve or recover from the crisis situation
A crisis situation involves:
5. A threat to resources and people
6. A loss of control
7. Visible and/or invisible effects on people,
resources and organizations

CRISIS MANAGEMENT
PLANNING (CONT)
Benefits of Crisis
Management
Planning

Adequate time to prepare an effective response

An opportunity
are trained
toto
investigate
activate
the
andappropriate
select
Personnel
before
the crisis.
alternative
crisisresponse
management
to different
responses.
situations.

KEY ELEMENTS OF A GOOD

CRISIS MANAGEMENT PLAN
Organizational
structure of crisis
management team
Protection and
evacuation of
personnel
Safeguarding of
production facilities

The structure of the crisis management team

should be clearly established in the plan.

The crisis management plan should contain

measures to protect all employees from any
foreseeable danger.
Procedures should be developed for shutting down
potentially hazardous operations to protect
facilities from further damage.

Communication during The organization must communicate effectively.

The crisis management plan should specify the
and after the crisis
procedure for supplying during and after the crisis.
(media management)

BUSINESS 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 CONTROL
Frequently 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 control

o Is a mechanism whereby
an organization transfers
the legal responsibility for a
loss or responsibility for
financial consequences of a
loss to another organization.

Contractual transfer for

risk financing

o 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:

1.

Inability of the transferee to discharge its obligation due to

bankruptcy and no insurance has been arranged to finance
such payment.

2.

There is ambiguity in the wording of the agreement and the

transferee has disputed its obligation to pay any loss incurred.

3.

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
CONTROL
Significant in controlling risk with low probability
Involve substantial investment of cash resources will be
subject to cost benefit analysis
Application 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 future
Time difference between benefits generated and the
cost incurred

IMPORTANCE OF RISK CONTROL

(EXAMPLE)
RM
Initial cash outflow
Cost of sprinkler system

(8,000,000)

Annual net cash flow

Annual insurance premium
1,300,000
savings
Annual maintenance cost
(300,000)
Reduction in uninsured loss (cost)
410,000
The present value of an annuity of RM1 at 10% for a period of 10
Annual net cash inflow
1,410,000
years is 6.145.
Present value of positive cash
inflows is RM1,410,000 X 6.145
Present value of net cash flow

= RM8,664,450

= RM8,664,450 RM8,000,000
RM664,450 (positive value)
Decision: Company Y should install the sprinkler system as the present value of
the net cash flow is positive.

ROLE OF GOVERNMENT IN RISK

CONTROL

Introduce safety acts and regulations

Fire Safety Act 1998
Occupational Safety and Health Act 1994

THEORIES OF ACCIDENTAL
CAUSATION AND CONTROL

Domino
Theory

The study of of
industrial
accidents and
worker injuries

Energy
Release
Theory

A result of
uncontrolled
release of energy
in structures

LOSS PREVENTION AND

CONTROL STRATEGIES
Human behaviour approach
Introduce by domino theory
Caused by human fault and negligence
Risk control strategy through safety education,
motivation of persons and enforcement of the safety
rule

Engineering approach
Introduce by energy release theory
Caused by physical engineering problems
Focus on elimination of the mechanical and
environmental factors

RISK CONTROL MEASURES FOR

SPECIFIC EVENT
A well designed control programmed should
include;
1. Personnel
2.Liability loss control
3.Property protection
4.Security
.Objective Provide appropriate control
technique of specialized risk control

RISK CONTROL MEASURES FOR

SPECIFIC EVENT
FIRE
PRODUCT LIABILITY
THEFT
EMBEZZLEMENT AND FRAUD

FIRE
Cause of fire :Sources of ignition energy
Human failings carelessness, malicious
intent, failure to comply with safety rules
Three main causes industrial fires;
Misuse electrical equipment
Burning and spark generation equipment
Cigarette light

FIRE (CONT)
Principles of fire risk
prevention & control
Relating to
controlling/eliminating 1 or
more 3 element of fire
triangle
Fire prevention measures
Control heat
Loss control measures
extinguish fire (water or other
extinguishing agents)

FIRE LOSS PREVENTION AND

CONTROL
4 areas;
1.
Structural fire protection Fire protection using fire
barriers
2.
Elimination of source of ignition Identify and remove
heat from fuel
3.
Detection of outbreak of a fire Use alarms to detect and
extinguish
4.
Fire extinguishment Fire extinguish equipment -fire
suppression sprinkler (water)
Industrial company;
5.
Type of building constructions can withstand fire hazards
6.
Fire resistance walls fire will not spread
7.
Control sources of ignition monitor use of flammable
liquid
8.
Design fire detection to alert premises

PRODUCT LIABILITY
Legal liability for defective product

Faulty product be held liable for bodily injured or property

damage
Arises one 3 basis;
1.

Negligence

2.

Breach of warranty

3.

Strict liability

Steps to manage product liability risk

4.

Product design include current safety measures

5.

Implementation of quality control production process

6.

Documentation of quality control measures liability claims

in court

7.

Review packaging and labeling ensure quality and safety

requirement.

8.

Review and revised supplier contract

9.

Contingency plan recall defective product and respond

quickly

THEFT RISK
Security Protect assets from crime
Theft Unlawful taking property belongs to others
Loss 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 control
Measures 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 Flow
Link process without duplication
2nd person check 1st person work
Authorization
User of assets different from their custody
E.g.; Inventory clerk release material upon authorization from department
head
Keeper
Record keeping & Bookkeeping separate from Handling & custodian of assets

Q & A SESSION