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By M. Abdullah Farooqui Senior Manager, Corporate Services, PPL
Jan 03 - 16, 2000

Risk management may be defined as the minimisation of the adverse effects of pure risks within a business. Pure risks can only result in a loss to the organisation; whereas speculative risks may result in either gain or loss.

Within the context of a risk management programme, risk may be defined as the chance of loss, and the programme is therefore geared to the safeguarding of the organisation's assets, namely: manpower, materials, machinery, methods, manufactured goods, and money.

The role of risk management in industry and commerce is to:

1. consider the impact of certain risky events on the performance of the organisation;

2. devise alternative strategies for controlling these risks and/or their impact on the organisation; and

3. relate these alternative strategies to the general decision framework used by the organisation.

Inter-relationships and historical development

Before discussing the concept and approach of risk management in detail, it is useful to examine the development of risk management and the interrelationship between the various component disciplines. Such an examination highlights the logical progression from one discipline to another, and also shows the increased emphasis placed on the economic argument as the progression develops.

Safety in an industrial context — may be defined as the minimisation of contact between person and hazard, and is predominantly concerned with the prevention of physical harm (injury) to an individual. Thus, the traditional approach to safety has been inspired by humanitarian considerations, and spurred on by legal sanctions without much recourse to the economic argument. Thus, safety was primarily concerned with the prevention of serious or reportable injuries, and much effort was placed on post-injury investigations, rather than on pre-accident prevention.

Gradually, however, it was realised that there was a need to examine all injury accidents, irrespective of severity; and, also those accidents from which injury did not result — i.e. damage and near-miss accidents. This led to the discipline known as loss prevention.

Loss prevention may be defined as the application of engineering techniques in order to reduce the likelihood of accidents that could result in personal injury; property damage; and the near-misses.

With the broadening of the data base to include a wider range of accident situations, it became apparent that the next stage in the development was to include any accident which resulted in a loss to the organisation.

Thus, areas such as fire prevention, security, health and hygiene, pollution control, product liability, and business interruption were grouped together with loss prevention to form the wider discipline of loss control.

Risk management (or risk reduction) may be defined as a management system designed to reduce or eliminate all aspects of accidental loss that lead to a wastage of an organisation's assets.

As the emphasis on the economic argument increased, the technique of loss control has become more closely allied to financial matters, and in particular insurance.

The bringing together of insurance (risk transfer) and loss control (risk reduction) was the final stage in the development of the new discipline of risk management.

This logical, progressive development from safety to risk management may be presented in program form as:

Techniques of risk management

Risk management involves the identification, evaluation and economic control of risks within an organisation.

Risk identification may be achieved by a multiplicity of techniques, including physical inspections, management and worker discussions, safety audits, job safety analysis, and Hazop studies. The study of past accidents can also identify areas of high risk.

Risk evaluation (or measurement) may be based on economic, social or legal considerations.

Economic considerations should include the financial impact on the organisation of the uninsured cost of accidents, the effect on insurance premiums, and the overall effect on the profitability of the organisation and the possible loss of production following the issue of Improvement and Prohibition Notices.

Social and humanitarian considerations should include the general well-being of employees, the interaction with the general public who either live near the organisation's premises or come into contact with the discharges etc. — and the consumers of the organisation's products or services, who ultimately keep the organisation in business.

Legal considerations should include possible constraints from compliance with health and safety legislation, codes of practice, guidance notes and accepted standards, plus other relevant legislation concerning fire prevention, pollution, and product liability.

The probability and frequency of each occurrence, and the severity of the outcome — including an estimation of the maximum potential loss — will also need to be incorporated into any meaningful evaluation.

Risk control strategies may be classified into four main areas: risk avoidance, risk retention, risk reduction and, risk transfer.

Risk avoidance

This strategy involves a conscious decision on the part of the organisation to avoid completely a particular risk by discontinuing the operation producing the risk and it presupposes that the risk has been identified and evaluated.

For example, a decision may be made subject to employees' agreement, to pay all wages by cheque or credit transfer, thus obviating the need to have large amounts of cash on the premises and the inherent risk of a wages snatch.

Another example of a risk avoidance strategy — from the health and safety field would be the decision to replace a hazardous chemical by one with less or no risk potential.

Risk retention

The risk is retained in the organisation where any consequent loss is financed by the company. There are two aspects to consider under this heading: risk retention with knowledge, and risk retention without knowledge.

a) With knowledge

This covers the case where a conscious decision is made to meet any resulting loss from within the organisation's financial resources. Decisions on which risks to retain can only be made once all the risks have been identified and effectively evaluated.

b) Without knowledge

Risk retention without knowledge usually results from lack of knowledge of the existence of a risk or an omission to insure against it, and this often arises because the risks have not been either identified or fully evaluated.

Risk reduction

The principles of risk reduction rely on the reduction of risk within the organisation by the implementation of a loss control programme, whose basic aim is to protect the company's assets from wastage caused by accidental loss.

The collection of data on as many loss producing accidents as possible provides information on which an effective programme of remedial action can be based. This process will involve the investigation, reporting and recording of accidents that result in either injury or disease to an individual, damage to property, plant, equipment, materials, or the product; or those near-misses where although there has been no injury disease or damage, the risk potential was high.

The second stage of the development towards risk reduction is achieved by bringing together all areas where losses arise from accidents — whether fire, security, pollution, product liability, business interruption etc., — and coordinating action with the aim of reducing the loss. This risk reduction strategy is synonymous with loss control.

Risk transfer

Risk transfer refers to the legal assignment of the costs of certain potential losses from one party to another. The most common way of effecting such transfer is by insurance. Under an insurance policy, the insurer (insurance company) undertakes to compensate the insured (organisation) against losses resulting from the occurrence of an event specified in the insurance policy (e.g. fire, accident, etc.).

The introduction of clauses into sales agreements whereby another party accepts responsibility for the costs of a particular loss is an alternative risk transfer strategy. However, it should be noted that the conditions of the agreement may be affected by laws such as the Unfair Contract Terms Act 1977 of U.K and the interpretation placed on 'reasonableness'.

Risk management in practice

The term 'risk management' refers to the process of reconciling the conflicting demands of the various aspects of risk control. Where this occurs it is usual for the person controlling the work the 'risk manager', to be a senior member of management reporting to an executive director. He would co-ordinate the work of the insurance, health and safety, fire, security, environmental and quality control specialists. Liasion with outside bodies such as insurance brokers, Insurance companies, Government Labour Inspectorate, Fire Prevention Officers, etc., is an important part of the overall risk management activities, and should be actively encouraged.

The prime aim of a practical risk management programme is to provide a cost-effective system designed to protect the resources of an organisation by controlling the risks it faces.

Cost-effectiveness of risk management

The three fundamental arguments that may be employed to promote action in the field of risk management concern the legal, humanitarian, and economic aspects.

For the vast majority of organisations, there will be few or no quantitative data relating to the economic facets, and particularly to the costs associated with accidents. In order to be able to demonstrate cost-effectiveness (or cost benefit), there is therefore a need to be able to quantify the cost of all losses associated with accidents.


To recapitulate one can say that as the size and complexity of industrial sites is increasing and the human population is moving nearer, there is a greater onus to manage risks. Risk Management involves knowing what are the risks, what is their magnitudes and potential consequences, what is the appetite to absorb risks, what is the practical and reasonable extent of controlling and retaining the risks, and what should be the extent of transfer of risks to third party. Furthermore, that traditionally various risks have been handled independently from each other but now the trend is to manage all risks from a common platform, under a common policy and on a portfolio basis. This approach is more economical and efficient. .

This Risk Management concept as a general management function seems to be gaining practical acceptance in USA, UK and Europe and mostly as a voluntary option but the likelihood of its becoming a federal or national law requirement may not be far off.

Oil and gas companies should note that the American Petroleum Institute has issued API Recommended Practices 750 in January 1990 which incorporates elements of Risk Management.

We in Pakistan should not brush it aside as a too complex and cumbersome management concept or premature for our social, political, and industrial environment. Remember, we have twofold duty to perform as industrial managers i.e..

1. To make up the gap in technological development as well in management practices as quickly as practical and then

2. To maintain the pace in future to remain abreast wherever reasonable standards have already been achieved.


1. Bob Skelton, 1997, Process Safety Analysis, published by Gulf Publishing Company, Houston, Texas, U.S.A.

2. Robin Pitblado and Robin Turney, 2nd. Ed. 1996, Risk Assessment In The Process Industries, published by Institution of Chemical Engineers, Wawickshire, U.K.

3. Clyde B. Strong and T. Rick Irvin, 1996, Emergency Response and Hazardous Chemical Management, published by St. Lucie Press, Delray Beach, Florida, U.S.A.

4. Jacques Van Steen, Tno.1996, Safety Performance Measurement, distributed by Gulf Publishers Company, Houston, Texas, U.S.A

5. Harris R. Greensberg & Joseph J. Cramer, 1991, Risk Assessment and Risk Management for the Chemical Process Industry, published by Van Nostrand Reinhold 115, Fifth Avenue, New York

6. John Ridley, 2nd Ed. 1986, Safety at Work, published by Butterworths, Borough Green, Sevenoaks, Kent, England.