When comparing the risk management and loss prevention disciplines, it is important to recognize that the two functions share many common missions. They both manage risk, they both try to minimize losses to the company, and they both need to assess the cost of a loss control solution versus the benefit it brings. But there are also some significant differences in their missions.
The risk management mission is to identify and measure exposures to loss.
Most often, the risk manager is more financially based and concentrates on defining exposures. They are focused on losses. They often have a very small or no field staff. They have significant dealings with third-party representatives, such as insurance brokers and carriers. Their risk handling tactics include avoidance, prevention, reduction, segregation, and risk transfer. They are responsible for managing claims and litigation reserves. The risk manager can be said to be more involved in the big picture and often plays a significant role in disaster planning.
The loss prevention mission is to identify and evaluate the potential exposures to loss incidents.
On the other hand, the loss prevention manager tends to be more asset based. They concentrate on protecting cash, property, and people. They typically have a small office staff with a larger store-oriented field organization. They are focused primarily on prevention. Their risk-handling tactics can be categorized as prevention, detection, investigation, resolution, and recovery. They are more involved in store operations and the day-in, day-out details versus their risk manager counterparts.
The Risk Management Process
In order to understand the common areas of responsibilities, loss prevention managers must first understand the primary elements that comprise the risk management process.
Risk identification, according to Certified Risk Managers International, a certification organization for risk managers, is defined as the process of examining and determining the potential sources of loss faced by an organization.
Some common methods of risk identification include checklists and surveys, policy analysis, review of control.
Risk analysis actually consists of two separate elements. The first is a qualitative element, looking at what risks the organization is exposed to. Risk assessment, financial assessment, and loss data assessments are all examples of qualitative analysis. Quantitative analysis, on the other hand, is the process of determining how much risk there is. This type of analysis involves quantifying exposure, projecting losses, cost/benefit analysis, and deduction or retention analysis.
Risk control is the next step of the process and is defined as any conscious action or inaction to reduce the probability, frequency, severity, or unpredictability of loss.
Risk control activities can be broken down into pre-loss and post-loss activities. Pre-loss control activities include avoidance, prevention, reduction, segregation, physical transfer, or a combination of any of these activities. Post-loss control activities include claims management, litigation management, and disaster recovery.
Risk Financing is the fourth element of risk management and is defined as the acquisition of funds, at the most optimal cost, to pay for losses that strike the organization.
This is the insurance portion of risk management.
Risk Administration is the final stage of the risk management process and is defined as the implementation and monitoring of risk management policies and procedures.
Risk administration activities include planning, policy development, implementation, and monitoring.
Finding Common Ground
This understanding of the risk management process will help us identify which common areas of responsibilities and opportunities can be capitalized upon to formulate a working partnership. At first glance, risk control seems to be the area with the most common ground, but all of the activities, with the exception of risk financing, actually contain significant areas in which risk management and loss prevention can work together to provide greater benefits to the company.
The first step towards maximizing the potential of working together is to meet and explore common areas of responsibilities. Take the time and make an effort to learn about one another’s jobs and how, when, and where they intersect.
Good communication between loss prevention and risk management can help prevent a bad decision from being made or avoid an oversight regarding the failure to identify a particular risk. Loss prevention’s connection to store operations should help contribute knowledge about new risks or exposures as they develop.
As you begin this process, you will be able to identify ways to split up duplicate tasks and leverage resources between your departments. An example of this would be to use loss prevention resources to assist with risk management field projects, like store inspections. This could easily be incorporated into a store audit process, which in many instances is something the loss prevention staff is already doing.
Another example would be to use the insurance company or broker’s loss control resources for LP projects, like safety awareness or emergency preparedness. These entities often have considerable expertise and know-how in this area. Best of all, because these services are usually built into the insurance premiums, they may be provided free of charge.
In addition, the two departments can share information, reports, and data that help to define risks. Loss prevention management and statistical analysis reports can provide the risk manager with real-world, real-time insights into theft losses as well as fraudulent activity experienced in the stores. Conversely, risk management loss runs can help identify areas like safety or property risks that the loss prevention professional can address.
Loss prevention should also make certain they are marketing their successes to the insurance underwriter. Working with the risk manager, inform the underwriter of what measures have been taken to reduce or mitigate losses and exposures to help reduce insurance premiums. Benchmark your departments’ successes and achievements by using nationally accepted studies such as the National Retail Security Survey, published annually by the University of Florida. As an example, if your retail chain is experiencing burglary incidents at a rate that is 35 percent below the average for your sector, use this type of information as a bargaining chip during premium rate negotiations.
Success Stories
Let’s look at a few examples of how the partnership has worked and how it has contributed to the bottom line.
Nonproductive Shoplifter Stops. The first example is one that involved a large discount retailer. Their problem was nonproductive shoplifter stops, which frequently resulted in civil suits.The impact went well beyond unhappy customers. In a misguided effort to mitigate losses in civil suits, the loss prevention staff was not permitted to talk to, apologize, or say anything to the person who had been detained. There was a fear of the loss prevention agent implying responsibility or admitting fault. In fact, at this company, there was no follow-up contact with the customer at all. The company took a wait-and-see attitude and only responded after the customer who had been detained contacted them.
As a result, customers became angry and eventually sought the assistance of an attorney to seek retribution. These cases often resulted in potentially expensive litigation and were settled out of court for much larger sums of money than was necessary.
After first addressing the problem of nonproductive stops with better training and more stringent standards, this company turned its attention to handling those nonproductive stops that still occurred much differently. The solution in this example was that loss prevention and risk management worked together to develop a rapid-response litigation avoidance strategy. This strategy gave the district LP managers the authority to contact the customer immediately after the incident, apologize where appropriate, and settle claims with gift cards, merchandise, or other compensation up to one thousand dollars. The risk management department trained the loss prevention staff on how to handle claims and deal with customers.
This new strategy resulted in the customer feeling that someone cared about what they had gone through, even though the loss prevention agent had made a mistake. The customer received an apology and could talk with someone who was able to listen as well as explain what challenges retailers face regarding shrinkage. More often than not, this was satisfaction enough for the customer and the matter was successfully resolved. The majority of cases were settled using a gift card or merchandise valued under one hundred dollars. Paid settlement dollars dropped dramatically. Most litigation was avoided entirely, which substantially reduced the claims being submitted to the insurance carrier, resulting in lower premiums being paid for general liability coverage by this company.
Oil-Out and Wheel-Off Claims. An automotive retailer was experiencing huge losses from what is known in the industry as oil-out and wheel-off claims. These claims occur when oil is removed,but not replaced, or when wheel lug nuts are left loose, resulting in a wheel coming off a moving vehicle.
The impact of these claims was significant. Obviously, customers were unhappy. It took additional payroll to process claims. There were high out-of-pocket expenses for the company for paying deductibles. More insurance claims were being paid out. It was difficult to determine fraudulent claims from real ones. And insurance premiums and deductibles were skyrocketing.
The loss prevention department worked with the liability insurer’s loss control department to identify the problems and analyze the causes. From their analysis, they developed a program called Second Check. This program required a different person to recheck all fluid changes and tire work. The insurance company agreed to pay for the development and distribution of a training video, with the condition that the Second Check program be implemented chain-wide. The video was used to train all associates and new hires.
The results were nothing short of fantastic. Claims were significantly reduced. The liability insurer was so impressed with the results, they couldn’t wait to work on additional preventative programs, offering once again to help underwrite the costs. The workers’ compensation insurer partnered with loss prevention to put similar injury prevention programs into place. Within two years, the company was able to renegotiate their insurance premiums for an annual savings of over two hundred thousand dollars.
Workers’ Compensation Claims. An outdoor sporting goods retailer had no workplace safety program in place. This situation had resulted in excessive workers’ compensation claims and higher insurance premiums. In addition, regulatory programs had either not been developed or not properly implemented. Several Occupational Safety and Health Administration (OSHA) inspections had resulted in the identification of multiple infractions with the potential for significant fines. Action needed to be taken quickly and decisively.
This company’s LP director worked with their corporate risk manager to identify the problems. The insurance broker helped them conduct job-hazard analyses on all positions and make recommendations for work-process changes and personal protective equipment. Within six months the company had developed a hazard communication program, a material safety data sheet (MSDS) program, safety training materials, safety awareness programs, and had added safety awareness materials in a new associate orientation computer-based training module.
These efforts resulted in a significant reduction in worker injuries with the resulting potential for premium savings down the road. The company is now OSHA compliant and the risk manager was able to use information about the programs and results to keep overall insurance costs down in spite of a very volatile insurance market.
Other Ways to Partner
With these examples in mind, let’s explore some other ways that risk management and loss prevention can add value to their respective positions while adding dollars to their company’s bottom line.
Threat Assessments are critical to both disciplines. By teaming up, you can split the workload and minimize duplication of effort. This presents an ideal opportunity to use LP resources in the field to gather store-specific information, saving the company unnecessary travel and expenses. Loss prevention reports and statistical information regarding theft and fraud can also aid this task immensely.
Security Surveys can be modified to consider risk management as well as loss prevention concerns. Important risk management information can easily be collected in the course of normal store visits and audits. This is another area in which you can tap into the resources of insurance company loss control departments to provide sample surveys and other examples. Positive information collected on the surveys can be used to help convince underwriters to reduce premiums, while less favorable information will identify areas that need attention and further analysis.
Physical Security considerations pose significant implications to your company’s risk exposure. You should be certain to get input from your property insurance company before you start to build. Proper attention to design and construction of sprinkler systems, alarms, access control, and construction materials can save premium dollars. Regular inspections or reviews should also be conducted to help mitigate risk and prevent losses.
Burglar and Fire Alarm System Testing is an area that is often overlooked. Loss prevention field staff can be used to conduct some of the tests in order to save costs. Regular testing is needed to comply with local laws and National Fire Protection Association (NFPA) guidelines. You should also recognize that increased levels of certain protection could result in reduced premiums or discounts. Proper attention in this area helps to ensure a safer environment for all associates and customers.
Regulatory Compliance has become increasingly important in the program, the retail industry. The Occupational Safety and Health Administration (OSHA), Environmental Protection Agency (EPA), Bureau of Alcohol, Tobacco and Firearms (ATF), the Department of Labor (DOL), and the Department of Transportation (DOT) are but a few of the regulatory agencies that you may have the pleasure of working with. The simple math here is “better compliance equals less exposure.”
In a retail environment, OSHA concerns include hazard communication, job-hazard analysis, material safety data sheets, blood-borne pathogens, and ergonomics. EPAinvolves evaluation and management of waste, stream runoff, and recycling programs. ATF deals with the licensure, sale, and recordkeeping of firearms, tobacco, and alcohol. DOL monitors and enforces labor laws. The DOT regulates shipping and transportation. Noncompliance in any of these areas can result in significant fines, not to mention the potential cost of injury or litigation.
Safety Programs not only demonstrate to your customers and employees that you care, but they help to minimize risk and exposures and can result in significant savings for your company. Be certain you are sharing information about accidents, claims, and loss runs with all associates to keep awareness up and safety top of mind.Work with insurance and risk management resources to analyze claims data and look for trends. Develop programs to address the root causes of the most serious or most frequent type of accidents. Remember to usd the broker or insurance company’s loss control department to assist in analysis and development of programs.
Emergency Preparedness means losses are less likely to happen and if they do occur are less likely to be catastrophic. Emergency procedures must be documented and made available in every work area. Drills should be conducted periodically and associates provided with feedback on their performance. Emergency procedures are only as good as the people who use them. If nobody knows or remembers what they are, they may as well not even exist.
Getting More Information
The partnership between loss prevention and risk management is one that can pay big dividends and contribute to your company’s bottom line. With education and involvement, both departments, as well as the overall company, will benefit.
For more information, contact the following resources:
- Other risk management and LP professionals
- Your broker or insurance company loss control departments
- State and federal OSHA or EPA consultin
- Risk and Insurance Management Society (www.rims.org); International Risk Management Institute (www.irmi.com)
- Certified Risk Managers (www.scic.com/crm/frameset.htm)
This article was originally published in 2002 and was updated July 26, 2017.