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Proper loss control involves looking beneath the surface.

Proper Loss Control Involves Looking Beneath the Surface

The cost of risk can be viewed as an iceberg that has a side hidden under water that is just as large and dangerous as the more visible portion on top, according to Thomas Kaiser, senior vice president of Arkwright Mutual Insurance Company in Waltham, MA.

Mr. Kaiser said his "iceberg" theory projects these hidden costs from one to 50 times greater than the insurance costs. These costs can encompass the price of new machinery, the loss of shelf space and storage, training employees and an increase in advertising to regain market share.

"The cost of risk is the sum of all accidental losses," he explained. "Some of these costs are easy to identify, such as the direct cost of risk control. Other costs are more difficult and complicated to measure." Mr. Kaiser said they include the "cost of risk transfer, retained losses, uninsurable losses, personnel losses, the loss of good will, loss of market share and time spent by [risk managers] and other managers to restore the operation back to normal."

Thus, minimizing the long-term cost of risk involves more than reducing the cost of insurance premiums. In addition to deductibles and self-insurance, it involves the cost to measure, prevent and reduce the size of accidental losses. These are often hidden costs, which cannot be seen unless one looks beneath the surface.

To Survive

For an organization to survive, Mr. Kaiser said it must have the necessary cash flow, be able to retain key personnel, have products and services which are accepted by the government and the public and meet its legal obligations.

Mr. Kaiser urged risk managers to ponder the various scenarios, or "what ifs," that could interrupt their businesses. He said: "Ask yourself, `How safe is your company if there is a prolonged interruption of a major supply of as much as 40 percent of what you need to produce your products?' The real impact of this is a series of cost increases impacting the price of supplies and the cost of finished goods."

Mr. Kaiser said the effect on initial manufacturers and their customers is fairly easy to comprehend, but it becomes more cloudy when you look at customers' customers, a step not always taken by risk management.

Finally, Mr. Kaiser stressed the cost of an ill-managed disaster such as the Exxon Valdez. "Public support is important for business. Who needs to be in the position of Exxon, where public criticism has become a hobby? People send in their credit cards, pictures of dead birds. Survival requires strong loss prevention efforts, forward-looking leadership, a corporate policy approved by top management."

He said, "Ask anyone who has suffered a large loss: The problem begins--not ends--when the loss occurs."

PHOTO : Thomas Kaiser, senior vice president of Arkwright Mutual in Waltham, MA, shares his

PHOTO : knowledge of loss control in many languages.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Oshins, Alice H.
Publication:Risk Management
Date:Dec 1, 1989
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