The evaluation and quantification of the impact of potential losses on the business, should always account for both direct and indirect, immediate and long term costs.

Whilst the evaluation process will be different for each organization. It should where possible include statistical evidence based on previous experience and incidents. These statistics should be sourced from both within the business, and where possible, from other similar industry groups in Australia and internationally.

Where relevant data is included from any appropriate previous insurance coverage, this should be organized carefully to account for anomalies and differences in policy limit, deductibles and extend of cover.

Certain losses (such as liability or workers compensation incidents) may take some time to be finalized due to court actions, or delays in determining the final extend of personal injuries. The original estimate calculated for the total cost is often revised on several occasions when more accurate information is provided.

The Risk Matrix is a handy took to enable management to obtain a “snapshot” of key risks, and prioritize activities and/or capital expenditure. These are numbers variations of this tool used by risk managers and risk management consultant, but all essentially aim to matrix the likely frequency of risk against the likely severity or risk.

The following is an example of how the risk matrix can be used.

Corporations that own or operate hazardous operations need to place even greater emphasis on quantifying all areas of cost. They need to conduct a careful assessment of the risk – benefit attributes of all facilities, and eliminate unwarranted risks.

A grave example is the devastating effects of the leakage of Methyl Isocyanate gas at the Union Carbide plant in Bhopal, India on 3 December 1984. Such an assessment by Union Carbide would have shown that their Bhopal pesticide plant contributed less than half of one percent to company profits, but represented a life threatening risk to the company and the city of Bhopal.

The human toll from this loss exceeded 3,300 deaths with more than 20,000 people suffering long term effects from exposure to the gases.

Apart from massive litigation, this single loss incident triggered sanction and protest against the conglomerate around the world which had a devastating impact on the business. At the time of the accident in 1984, Union Carbide has sales revenues of $9.5 billion, net income of $323 million, and total assets of $10.5 billion. Three years later, the sales revenue had fallen to $6 billion, assets had shrunk to about $6.5 billion, and shareholders equity fell from $4.9 billion to under $1 billion. This drastic reduction in size occurred without a single penny being paid in compensation to victims of the disaster.

Risk Management Defined | Why Risk Management? | Risk Management Tools | Risk Identification and Evaluation
Evaluation and Quantificaion | Avoiding, Reducing and Controlling Risk Exposures