ENTERPRISE RISK MANAGEMENT 3B
ENRM 7322
LEARNING UNIT 8
Response : Risk Control
Prescribed Text :
Chapter 8 pp. 130 - 186
Theme 1: Introduction to risk control
Suppose a friend of yours is getting married,
and he has just asked you to transport the
wedding cake to the venue. You haven’t
planned for this, and you’re quite nervous – for
obvious reasons! Nonetheless, you can’t refuse
your friend on his wedding day, so
you emphatically agree, but are secretly
terrified.
•What would you do to ensure that you get the cake to the venue in one piece?
•(Think of all the possible precautions you would take);
•How would you measure the loss if you damaged the cake - by the value of the
cake or the fact that the bride-to-be will never talk to you again?
•Businesses are faced with risks every day – how do they know which risks to control for?
1. Introduction
´ This learning unit is a follow up to the previous learning units i.e.
´ LU5 – Ch. 5 – Risk Identification;
´ LU6 – Ch. 6 – Risk Evaluation.
´ In this learning unit we study Risk Response: Risk Control;
´ The three possible responses to business risks are:
´ Accept the risk;
´ Transfer the risk;
´ Mitigate the risk.
´ The two main mitigation processes are:
´ Risk control; and
´ Hedging.
Definition of Risk Mitigation
The physical control of risk, or the prevention
and control of losses – usually referred to as
risk control – is mainly used for the control of
event risk, whereas hedging is mainly used for
mitigating the consequences of incidental risk
such as foreign exchange risks and other
financial risks.
8.2 Meaning of risk control
Definition
Risk control is therefore defined as a method of
countering risk. In the broader sense (as intended), it
includes all activities conducted for the purpose of:
• eliminating or reducing the factors that may cause
loss to a person or organisation; and
• minimising the actual loss that occurs when
preventative methods have not been fully effective.
8.3 Development of risk control
• Fire risk control
• Engineering risk control
• Occupational accidents
• Accident control in South Africa
• Workers’ compensation in South Africa
• Workers’ compensation in other countries
8.4 General principles and objectives of risk control
General principles of risk control:
• the identification and application of management principles to
risk control
• recognition that risk exposures and their associated losses
should be deliberately assessed
• meaningful attempts at loss prevention, recognising the impact
of losses on the organisation and the economy as a whole
• recognition that the process is an ongoing one that faces the
challenge of the pace of technological development
• recognition that approaches to risk control must be integrated
with the other activities within the organisation, thereby
acknowledging the existing interrelationships.
Objectives of risk control programmes:
• Reduction of the magnitude of the losses
• Reduction of the frequency of loss-producing events
Planning for and recovery from losses:
Recovering from loss-producing events (contingency planning)
Dealing with loss-producing events (emergency planning)
ACTIVITY FROM VC LEARN
´ Theme 1: Introduction to risk control
´ Introduction to Risk Control
´ Activity 8.1.1: Introduction to risk control
Theme 2: Approaches to loss prevention and risk control legislation
Following on from the previous scenario, having to transport
your friend’s wedding cake to the reception venue, you’ve
decided that the protective box supplied for transportation was
inadequate, so you’ve found a stainless steel box that will offer extra
protection.
You’re feeling confident about your plan until someone suggests
that you take an advanced driving course to make sure you get the
cake to the venue safely. Someone else jokingly makes a
remark that the shortest route to the venue statistically has a higher
accident rate, and so you should take the longer route. You know
that they are saying these things in jest, but you can’t help
but consider these additional measures
•Which approach do you think will have the biggest impact on mitigating risk?
•How would multiple approaches affect your efforts to minimise risk?
•Should businesses take multiple approaches to try and mitigate their risk?
Why/ why not?
8.5 Approaches to loss prevention
• Engineering approach
• Human or personal approach
• Educational, statistical and enforcement
approaches
8.6 Risk control legislation
ACTIVITY FROM VC LEARN
´ Theme 2: Approaches to loss prevention and risk control
legislation
´ Approaches to Loss Prevention and Risk Control Legislation
´ Activity 8.2.1: Approaches to loss prevention
Theme 3: Specific risk control programmes and codes of practice
Suppose you’ve just started a new job. You’re about
to get stuck into a report that you’ve been putting
off for the last few days when you are rudely
interrupted by the fire alarm. You’ve been at this
company for two weeks, and already there have
been three fire drills. It’s a source of frustration for
all of your colleagues, but having studied enterprise
risk management, you can see the value.
Your colleagues all complain about how these fire
drills affect their productivity negatively and are
therefore costing the company money.
•How would you convince your colleagues that these fire drills are necessary?
•Are fire drills enough to mitigate against the risk of fire? Why/ why not?
•What other types of risks do businesses, broadly speaking, need to mitigate against?
8.7 Specific risk control programmes and codes of practice
Safety:
• Statutory requirements
• Responsibility
• Safety programmes and organisations
• National Occupational Safety Association (NOSA)
Accident prevention: Definitions and concepts
Definition:
An accident is an undesired event that results in physical harm to a person and/or
damage to property. It is usually the result of a fortuitous contact with a source of
energy above the threshold limit of the body or structure.
Measurement:
Disabling injury frequency rate (DIFR)
DIFR = Number of disabling injuries × 1 000 000 / Total number of person-hours worked
Disabling injury severity rate (DISR)
DISR = Total days charged × 1 000 000 / Total number of person-hours worked
Methods available for preventing accidents:
engineering revision personnel selection, placement and adjustment
enforcement (discipline) education, training, persuasion and appeal
Occupational Health and Safety Act (OHSACT)
Application of the OHSACT:
• Safety standards
• Exemptions
• Safety organisation
• People responsible for safety
• Risk control organisation for safety
Occupational health
Definition:
Occupational health is concerned with any substance, process or circumstance
that may affect a person’s health or safety in the workplace.
Occupational safety:
Occupational safety covers physical safety from an accident prevention
perspective.
Occupational hygiene:
Occupational hygiene may be defined as a science devoted to the identification,
evaluation and control of those environmental factors arising in or from the
workplace that cause disease, damage health, or impair the faculties of workers
and other members of the community.
Occupational medicine:
Whereas occupational hygiene concerns the monitoring and treatment of the
workplace environment, occupational medicine, in general terms, concerns the
monitoring and treatment of people in that environment.
Products liability
Types of liability exposures:
• Liability for latent defects
• Liability arising out of suitability for purpose
• Liability for words
• Liability for manufacturing defects
• Liability for incorrect despatch
Risk control steps
• Existing quality assurance or control programmes
• Product liability programmes and quality assurance
codes of practice
• Elements of quality assurance codes – see next slide
for the different elements (more listed in prescribed
text) and the examples that follow
Elements of quality assurance codes
Management responsibility The quality system
Contract review Design control
Document control Inspection and testing
Product identification and traceability Inspection and test status
Inspecting, measuring and testing equipment Corrective action
Handling, storage, packaging and delivery Quality records
Internal quality audits Training
Liability for gradually developing
environmental impairment
• Liability for impairment recognised in principle
In South Africa, very few actions for damages arising from
gradually developing environmental impairment have been
instituted. In fact, until fairly recently, very little had even been
written on the subject.
However, our courts would not approach the claims for
environmental impairment as something different or unique,
simply because it was an action involving the environment. They
would simply apply the general principles of delict, which were
discussed earlier.
Risk control steps: Structuring the risk
identification audit
Surrounding land Air
Water Groundwater
Transportation Dams
Underground tanks Underground pipes
Solid waste Atmospheric pollution
Surface water Water
Fire risk control
• Legal requirements, codes of practice and standards
• Requirements of insurance companies
• Risk control
Natural perils
Definition
Natural perils are those hazards or pure risks
generally arising from natural causes, as opposed to
losses brought about by human actions.
Risk control techniques and measures:
• Risk avoidance
• Risk elimination
• Legislation
• Risk reduction
• Emergency planning
Crime perils
Definition
Security, as a business management risk control discipline, is
concerned with the provision of appropriate standards of
protection for people, property and other assets against the
security risks to which they are exposed.
Security risks are classified into the following four main
categories:
(i) criminal acts
(ii) negligence, carelessness and mischief
(iii) public liability losses
(iv) unconventional threats and mischief.
Motor vehicle risk control
Scope of vehicle risk control:
• Company policy
• Responsibility
• Driver selection
• Driver induction and training
• Driver motivation
• Vehicle maintenance
• Accident reporting and investigation
• Effective cost control
Motor vehicle risk control
Fleet types:
• Commercial and industrial vehicles;
• Allocated and allowance vehicles;
• Pool vehicles;
• Off-road vehicles.
Motor vehicle risk control
Freight:
• Explosives and hazardous substances;
• Passengers;
• Extra-heavy loads.
Consequential loss (business interruption)
The nature of the interruption risk control programme;
Sources of consequential losses;
Time-related aspects of consequential losses;
Accounting and insurance aspects of interruption losses;
Risk identification;
Risk evaluation.
Engineering risk control
Loss statistics of machinery breakdowns;
Risk control steps: Machinery breakdown;
Risk control: Suppliers;
ACTIVITY FROM VC LEARN
´ Theme 3: Specific risk control programmes and codes of practice
´ Specific Risk Control Programmes
´ Codes of Practice
Theme 4: Hedging of incidental risks
Suppose you’re in the process of buying your
first new car. You’re excited at the thought of
owning your very first car, but are slightly
nervous as you also have to take out vehicle
finance. You are concerned that while you
are able to afford the instalments now, you may
not be able to afford them in a couple of years if
there is a significant increase in the interest rate.
The sales person reassures you by offering you a
slightly higher rate that will be fixed. It’s higher
than the rate you were originally offered but at
least you know that it will be fixed for the
duration of the five-year period.
•How do you decide whether to take the fixed rate or the variable rate?
• What will influence your decision?
•How do fluctuations in interest rates, commodity prices and exchange rates affect
businesses?
8.8 Hedging of incidental risks
´ As an example – risk associated with foreign exchange rate changes;
´ A consequence of such changes is the effect on profit – can be
negative or positive – example?
´ One way of attempting to minimise this risk is to hedge such risks e.g.
forward contracts – obligates the owner to buy a given asset on a
specified date at a price specified at the origination (outset) of the
contract.
´ Consequences of depreciation of currency and impact on profits –
Fig. 8.1 and 8.2 on p. 218
8.8 Hedging of incidental risks
ACTIVITY FROM VC LEARN
´ Theme 4: Hedging of incidental risks
´ Hedging of Incidental Risks
Summary
Risk control was established as a sub discipline of physical risk
management, which encompasses the overall process of risk
identification and evaluation. In turn, physical risk management, when
integrated with the activities related to financial risk management,
constitutes the entire discipline of risk management.
Risk control was simply defined as a method of meeting risk. This
definition recognised the broad aims of:
• eliminating or reducing the factors that may cause loss (loss
prevention/control)
• minimising the actual loss that occurs when preventative measures
have not been fully effective.
References
´ Valsamakis, A.C., Vivian, R.W. and Du Toit, G.S. 2022. Risk Management. 5th
ed. Cape Town. Person
´ IIE 2024, Module Outline. ENRM7322
´ IIE 2024, VCLearn, Module Content, VCLearn. ENRM7322