Managing government is a risky business. Government entities and corporations are subject to a variety of exposures. To depend mainly on insurance for protection is not safe-proof. There is a need for a new response and the solution is the introduction and implementation of risk management policies in the government.
Historically, risk management has been an outgrowth of insurance management. The objective of risk management for any government entity and corporation is the conservation of its resources and assets from accidental loss and natural perils, such as typhoons, floods, earthquakes, and volcanic eruptions. These exposures affecting human financial, physical and natural resources are diverse and unpredictable.
The Elements of Risk Management cover the following:
- Exposure Identification. The creation of a continuous process of identifying the resources for which a government body is responsible and the accidental loss exposures that could materially affect them.
- Risk Evaluation. The measure of financial risk by analyzing past loss frequency and severity of individual and multiple government bodies, and by estimating future frequency and severity probabilities.
- Risk Control. The reduction or elimination of risk or loss, within proper economic constraints, through careful procedures and practices in security personnel safety, fire prevention, vehicle safety, products safety, environmental protection and emergency planning.
- Risk Financing/Funding. The provision of sufficient funds to meet loss situations if they occur, by the most effective use of internal or external financial resources, including the purchase of insurance.
- Risk Management Administration. The development of administration techniques to carry out the risk management process most effectively, using skills both inside and outside a government entity.
As a matter a fact on February 23, 1978, former President Ferdinand Marcos, recognizing the importance of Risk Management, issued Letter of Instruction No. 673. This LOI directed all Department Secretaries and Heads of Agencies, the Commissioner of the Budget, the National Treasurer and the General Manager of the GSIS to conduct studies for the purpose of developing and implementing a sound risk and insurance management program, covering the following specific tasks:
- Inventory the resources and assets of every department and agency and exposures to accidental loss;
- Analyze and measure the financial risk inherent in each exposure such as fire, earthquake, typhoon and other extraneous perils in terms of probable frequency and severity of loss and set up effective methods in avoiding and controlling all exposures;
- Evaluate the insurance policies covering the resources and assets of Departments or Agencies, in terms of scope of coverage, premium rates, adequacy of the sums insured and policy conditions;
- Study the advisability of establishing a sinking fund (as an immediate charge against reserves, profit or surplus), to assume losses resulting from risks which are not considered significant and will not unduly affect the financial stability of the Departments or Agencies concerned;
- Establish the basis of valuation of resources and assets in terms of book value, sound value or replacement value which should be related to the sums insured, of every insurance policy covering such assets and resources;
- Recommend policies on risk and insurance management for the guidance of the personnel to be entrusted with this responsibility.
The implementation of sound risk management program in government will go a long way in reducing risk and minimizing losses. There is no doubt that government needs Risk Management.
The author is a risk management consultant and Editor of Insurance Philippines magazine.
