Risk Management Techniques

Question 1: Risk Management Techniques Any successful, healthy and/or expanding company continues to survive and remain profitable through the utilization of strong proactive risk management techniques. Generally speaking the larger the company the greater the exposure to a variety of risks, such as property damage, worker’s compensation and product liability. In order to maintain a healthy growth pattern it is eminent that a company measures, calculates and controls their risk.

Several well-known and successful companies illustrate the deployment of thoughtful risk management strategies in reducing the limitability to a variety of risks. The large toy manufacturer Matter Inc. Protects its assets from product liability claims through retention and Insurance while Johnson & Johnson utilizes the strategies of Insurance and Loss Control to manage certain risks . The massive Walt Disney Corporation employs the techniques of Retention and Loss Control to reduce worker’s compensation claims.

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Johnson & Johnson mitigates property damage and inland transit risk using loss control measures and Insurance to transfer their risk exposure. The company protects its global infrastructure of 250 equines units and 1,000 business locations against property damage with property insurance. Through well managed loss control strategies the company has reduced its exposure to potential losses. Among other efforts the risk management department uses an electronic system to gather property value data from all business units. This system allows the company to “generate loss control priorities” (Concerns).

Various inspections are conducted every year in all of its units and recommendations are emitted which “helps set risk mitigation priorities. ” Besides loss control measures which reduces its exposures to possible losses, Johnson & Johnson maintains $60 billion dollars in ensured property values. For example, in 2005 the company experienced an explosion at one of their production plants which resulted in a $61 million dollar insurance settlement. Without an insurance policy in place and loss control strategies the company would have had to retain the extensive cost of damages from such an event.

A Large portion of Johnny’s & Johnny’s infrastructure is located in areas that bare a significant risk u to fire and windstorm exposure such as Puerco Rice, California and Japan where the company has over $8 billion in property exposures. To alleviate the potential risk in such a circumstance Johnson & Johnson has been proactive in their loss prevention strategies by researching and improving their infrastructure as a form of prevention. The company performed modeling on their infrastructure and made the necessary improvements when needed. According to Scott P.

Burp, director of corporate risk management at New Brunswick, N. J-based Johnson & Johnson, “the engineering improvements reduce Johnson & Johnny’s windstorm loss exposure by 90% totaling a $2. 5 billion loss exposure. ” Additionally according to Burp, “The electronic property tracking and compliance process has enabled Johnson & Johnson to reduce its property loss expectancy, which unlike a probable maximum loss That accounts for about 20% of the company’s total loss expectancy,” (Concerns) Furthermore, has continued to display an active role in managing and mitigating risk through insurance and loss control efforts.

For example, in 2008 a company truck eliding millions of dollars worth of products was hijacked. In response to this event the company implemented rigid security measures and evaluated their insurance purchasing practices. Over the last half of a decade Johnson & Johnson have recovered over $500 million dollars from insurers for a variety of claims that has included property and inland transit claims, while maintaining fruitful relations with insurers and avoiding significant increases to their premium rates. The Disney Corporation is a massive organization with annual revenue of around $ 35. Billion reduced from a variety of diverse industries. In the United States alone it has a staff of over 106,000 employees. Such a large and diverse company requires the development and implementation of an active and healthy risk management philosophy. Because Disney offers an enormous variety of service and product at a massive scale the company is exposed to a plethora of risks, be it from the parks/ resorts, media networks, and studios. Disney uses a combination of Loss control and Self-insurance techniques including a wholly-owned captive to transfer worker’s insemination risk.

Disney has excelled in their Loss control efforts to mitigate worker’s compensation claims through loss prevention programs, which are focused on occupational safety awareness, such as their Safety in Motion program. The Safety in Motion Program “focuses on reducing body motions and musculoskeletal injuries- particularly in the theme park and resorts segments,” and has, “reduced claims at the Walt Disney Resort by 38%, with similar results at other business units,” (Gasman). Other preventative measures include but are not limited to such programs as the

Shoes for Crews initiative which provides footwear designed to reduce the occurrence of accidental slip and/falls in food service locations. Another example of a loss prevention program is The Safety Management System which allows management to electronically report accidents and address the means for future prevention. Additionally, the company put in place a clear and proper channel for staff to report any safety concerns. Disney has successfully developed and implemented loss control strategies to prevent and reduce the impact of injury to its workers by initiating safety programs for a safer work environment.

At the Walt Disney World Resort in Florida, for example, “the OSHA frequency rate fell 60. 3 percent from 2002 to 2007, while the lost-time frequency rate fell nearly in half. The ultimate loss cost per $1,000 of payroll fell 26. 3 percent. Disney cited similar results at its Disney-land Resort,” (Gasman). However, workplace injuries cannot be completely eliminated and thus, larger business segments such as parks and resorts have the financial capacity to retain workers compensations claims, and yet, smaller units without the financial capacity are self-insured through their wholly-owned appetite.

Matter Inc. The worldwide leader in the toy industry uses insurance and retention to mitigate product recall and product liability risk. In 2007 Matter recalled approximately $20 million in toys that were found to be defected. The toys were manufactured in China and contained dangerous amounts of lead, this event had the potential to cause an extreme amount of litigation and a severe overall damage to the Mantel’s swift response in recalling the defective product reveals the companies proactive policy of preventing loss through potential litigation while also protecting he overall image of the brand.

Matter incorporates a stringent quality control process, however since a considerable portion of their manufacturers are overseas, in such countries as China, their process of quality checks is considerably weakened and thus they must rely on the strength of an efficient system of risk retention. In the 2007 situation, Matter retained the considerable cost of toy recalls because the premium coverage for product recalls was too high compared to the cost of recalling a product (Esters).

Matter is fortunate in that they have positioned themselves with he financial capacity to cover such an exposure because of its unique cash position the company has the capacity to self-fund the risk. The use of product liability insurance is used to protect Matter in the instances when the process of quality control brakes down and/or in the initial stages before retention is enacted and thus it acts as an immediate stopgap, protecting the company by mitigating any injuries to costumers resulting from defected toys.

The risk of larger scale risks such as product liability claims is a risk that the company does not self-fund but manages thru the rotational insurance market for catastrophic losses. Matter utilized its commercial liability insurance to mitigate claims cost against lawsuits resulting in the toy recalls in 2007. Disney, Johnson & Johnson and Matter all provide excellent examples in the reasons, processes and techniques involved in the risk management strategies of large companies.

Jesse
from Nandarnold

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