By R. Bruce Wright, CPCU

Most of the utilities in this power program are small enough not to have a full time “Risk Manager,” and consequently the work that would be assigned to a Risk Manager at a larger organization is usually spread out among multiple people. Other than at the largest members of our program, typically the Finance VP or office manager gets the insurance purchasing assignment (with guidance and/or approvals required from others), operations managers may be directed to make field decisions related to risk reduction, the designated safety officer gets the general safety assignment, and in most cases no one is given the explicit task of looking at the process of risk management holistically.

Does it matter? I think it does, so let’s take a quick look at what Risk Management is and how it relates to safety and loss prevention. (Warning, the next few paragraphs may be a bit dry and scholastic in tone, but please hang in there so we can all have a common frame of reference. The basic concepts are those advanced in the Chartered Property and Casualty Underwriters program.)

Let’s start with a basic definition of Risk Management. Traditionally, Risk Management is focused on managing safety, purchasing insurance, and controlling financial recovery from losses generated by hazard risk. A Risk Management Program is the system for planning, organizing, leading and controlling resources and activities that an organization needs to protect itself from the adverse effects of accidental losses. An even broader definition of Risk Management includes Financial Risk (outcomes from investing) and Strategic Risk (outcomes from business management decisions.) These are risks that involve the possibility of either loss or gain to the organization. For the purpose of this article, I will focus only on the pure risk associated with traditional Risk Management, where the outcomes are “loss or no loss,” not “loss or gain.”

There are four primary techniques available for use in a Risk Management Program. These four techniques are:

1. Risk Avoidance – eliminate the risk. For example, an electric utility may decide not to offer other services or products like propane, or appliances. They may also choose to have certain work performed by outside contractors, effectively eliminating the risk in particularly hazardous activities, such as blasting.

2. Risk Reduction – mitigate the risk. This is an “after the fact” effort, intended to get losses from getting larger than they have to. Having an automatic fire alarm is an example, as is using an outsourced specialty contractor to mitigate oil spills from transformers.

3. Risk Retention – accept the risk. Risk retention is a strategy where the cost of insuring against the risk would be greater than the total losses sustained; or risks that are so large or catastrophic that they either cannot be insured due to scope or infeasible premiums. (Deductibles are also a form of retention up to a pre-selected limit.)

4. Risk Transfer – purchase insurance to cover the risk. Risk pools are technically retaining the risk for the group, but spreading it over the whole group involves transfer among individual members of the group. This is different from traditional insurance in that losses in excess of available funds may be assessed back to all members of the group.

My goal here is not to present a class in Risk Management. Instead, the case I want to make is that there are unintended consequences of the way these techniques and functions are traditionally thought of in smaller companies. Senior Managers of utilities in this program tend to see insurance as a core element in Risk Management and they typically assign the responsibility for this important task to a high level person, such as the Finance VP, Office Manager, or even retain it themselves. However, they all too frequently see safety as a separate effort that is assigned elsewhere in the chain of command, often to a lower level member of the Operations Department. As a result, the two functions are not coordinated, and no one has responsibility for the “big picture” short of the GM or CEO.

I understand that many (if not most) of our program’s insureds are not in a position to hire a full time Risk Manager in the senior level of the company. However, the most effective approach to the problem of keeping safety and risk management working effectively in a coordinated manner is to keep both functions clearly in view. To achieve this, a number of participants in this program have decided to have their safety officer report directly to the GM or CEO. This accomplishes a number of good things. First, it removes the safety function from the direct impact of operational considerations, which provides some insulation (No pun intended!) from the pressures inherent in responding to demands caused by weather, equipment failures, or budgetary concerns. Secondly, it offers direct access to the top for the safety officer, providing a regular channel of communication as well as immediate access to the top when quick action is needed. Thirdly, it supplies the GM with regular reminders of all safety activities, which any leader needs to stay involved as a matter of course. Finally, it raises the profile of the safety effort and may even provide for regular reporting on safety efforts to the Board of Directors.

An effective Risk Management Program for reducing losses- liability, property, auto and WC- regardless of how well designed and planned, will only succeed when supported by a company culture that values it, and company cultures start at the top, as you have heard me say in the past.