Evaluating Your Risk Exposure

Evaluating Your Risk Exposure



By Donald Dunphy and Kate Vigneau, CAFM

May 2020

  
People who live by the power of positive thinking may be great assets for a team, but it’s not the most important professional attribute for your risk manager.  Effective risk management requires that an organization identify, then separate manageable and unmanageable risks. Fleet risk-management decisions rely on a wide range of stakeholders including department heads, mechanics, human resources and top management. NAFA recommends looking at risk management holistically by bringing these stakeholders together and ensuring they have a common vocabulary and the tools to properly evaluate and manage risks.
 

Risk Assessment
 
The NAFA Risk Management Grid is an effective framework for understanding and managing fleet risks. It reveals graphically how to visualize meaningful risks and their mitigation based on the associated costs of the severity and frequency of a range of risks.
 

Severity and Frequency  
 
Calculating risk exposure is a relatively simple equation: Exposure equals the total of all risks minus mitigating tactics to lessen their effectsThe grid illustrates how the risks faced by a fleet organization can and should be evaluated in terms of severity (how bad the consequences are, should they occur) and frequency (how often they may occur). Severity takes precedence over frequency, primarily due to the greater expected costs associated with severe losses. Thus:
 
  • Risks with both high frequency and high severity should receive the greatest attention to eliminate, as the potential losses are very high.
     
  • Risks with high severity that occur infrequently but with potentially catastrophic consequences take precedence over less severe risks that occur frequently. Organizations typically expend more resources to prevent or mitigate a single catastrophic event than directing resources to smaller, frequent losses.
 
  • Risks with both low severity and low frequency should typically be a lower priority to the risk manager, as the costs to deploy a mitigation strategy may be more than to simply ignore the risk.
 
Possible vs. Probable Risk Assessment
 
In assessing risk, professionals must consider possible versus probable loss. The maximum possible loss is the greatest loss an organization could experience if there is no loss mitigation strategy in place. It has potentially severe outcomes. A dramatic example is if there were a series of at-fault commercial carrier crashes that result in the Federal Motor Carrier Safety Administration suspending all carrier operations. 
 
At the other end of the spectrum, the maximum probable loss is a cost estimate of the likelihood of certain losses. A simple example is if an organization planned for a tsunami-sized disaster every day, it would never be able to conduct business. Probable risk is a reality check and can help shape a mitigation strategy. 
 

Four Risk Management Strategies  
 
Effective fleet risk managers regularly identify risk exposures. They know which risks are manageable, which are unmanageable, and which ones need immediate attention. There are four key strategies to address risk severity and frequency.
 

1. High Severity/High Frequency: Retain.
Based on a thorough analysis, retain only those risks which happen often but with a low impact on the organization.
 

2. High Severity/Low Frequency: Reduce. 
Reducing risk can minimize the severity of a loss. For example, proper driver screening and selection, driver training and a robust policy framework are basic first-line risk reduction strategies.
 

3. Low Severity/High Frequency: Avoid. 
Risk avoidance removes the probability and outcome of an adverse event. Some risks however are not within our control. When it comes to fleet management, common sense based on past experience is a good rule to follow.
 

4. Low Severity/Low Frequency: Transfer. 
Transfer or sharing of risk can be managed through third-party insurance.  Insurance is an essential tool to help cover the potential costs of risks that might otherwise jeopardize your organization’s continued operations.
 

Risk Assessment Grid 
 
The Risk Assessment Grid can be an indispensable diagnostic tool for risk and fleet managers. You can chart the severity and frequency of risks your organization faces and identify corresponding mitigation strategies.

 
  • High Severity/High Frequency: Avoid.
Fuel is an expensive component of fleet operation. Escalating fuel prices are outside of a fleet manager’s control but represent a persistent and potentially expensive threat to the bottom line. Hedging strategies lock in prices contractually.

 
  • High Severity/Low Frequency: Transfer.
Fatal crashes are very rare, but when they happen, the impact is severe. Organizations need to plan for rare catastrophic occurrences with comprehensive insurance which transfers or shares the risk.
 
  • Low Severity/High Frequency: Reduce.
Fleet managers face a frequent problem: Backing up is the number-one cause of crashes (frequency) but the damages are typically low (severity). Reduce occurrences with ongoing training and education, ground guides, and electronic back-up alerts.
 
  • Low Severity/Low Frequency: Retain.
A typical fleet example is fuel slippage. Everyone with their own pumps experiences it. If it is negligible (low severity) and infrequent (low frequency) it would cost more to install greater accountability systems than to retain this loss.
 
 
Be Prepared
 
When we are too close to a situation, any risk can seem unmanageable. The NAFA Risk Management Grid is an excellent too to assist stakeholders in thinking through the frequency and severity of risks in order to optimize a mitigation strategy. Organizations are risk averse when it comes to spending money on preventing something that may never happen. But an analytical approach in categorizing and evaluating risks helps identify the correct strategy and develop metrics to measure the effectiveness of that strategy. Risk assessment is a cost saving strategy and can contribute to the productivity of your organization.
 

SIDEBAR:
NAFA's Risk Management Reference Guide offers more on this topic. A new edition of this guide was released in March 2020 and is now integrated into the certification program. This and other valuable fleet guides can be purchased at www.nafa.org.
 
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