2.3 Hazard Risks

Hazard risks refer to unpredictable events that often arise from natural disasters, accidents, or other external factors. There are pure risks, which are generally insurable. These risks can significantly disrupt supply chains.

A manufacturing facility located in an area prone to earthquakes. A major earthquake could damage the facility, disrupt production, and impact the entire supply chain.

Following are some of the examples of the hazard risks:

  • Theft/Crime
  • Fire or any damage to the property
  • Business interruptions
  • Disease, personal injuries, disability
  • Liability

Categories of Hazard Risk

Hazard risk can be categorized into the following three categories:

  1. Personnel Risk: Personnel risk refers to the uncertainty related to potential losses a firm may face due to various factors related to its employees, such as death, injury, health issues, disability, and loss of a key employee.
  2. Property Risk: Property risk refers to the loss or damage to property or loss of wealth due to the damage to the property. For example, the loss of a manufacturing facility by an earthquake affects productivity.
  3. Liability Risk: A liability risk refers to the financial responsibility that can lead an individual or business to be held responsible for specific types of losses. This could be an injury or loss of wealth that an entity causes. For example, a liability related to a faulty product damaging a consumer’s health or injury.

How Hazard Risks Are Measured and Managed

Once a risk has been identified as a Hazard risk, the next step is to measure and manage it.

Frequency and severity are two key factors used to measure hazard risk. They help assess the likelihood of a hazard causing harm and the potential consequences of that harm.

  • Frequency refers to how often a hazard event might occur. This could range from “rarely” to “likely to occur often.”
  • Severity refers to the seriousness of the potential harm caused by the hazard. This could range from a minor injury to a fatality.

By considering both frequency and severity, we can better understand the overall risk posed by a hazard. This allows us to prioritize risk management efforts and focus on hazards with the greatest potential to cause harm.

Hazard risks are managed using different techniques; however, all the techniques move around following two basic requirements.

  • Prevent Losses.
  • Reduce frequency and/or severity.

What is a Loss Exposure

Loss Exposure is the potential for loss that an individual or organization faces due to the frequency or severity. While identifying the risk, it is important to know the exposure of loss in any particular risk so that the appropriate corrective action is taken.

There are three circumstances where loss exposure arises when they intersect.

  1. Asset Exposed to Loss: An asset that has a value and is exposed to loss, for example, tangible properties such as cash, property, investment, and intangibles such as patents and copyrights.
  2. Cause of loss: An event that has caused a loss, like fire, thunderstorm, explosion, accident
  3. Financial consequences: Financial consequences could be as simple as the loss of an asset damaged by fire, but they can be more complex when there is a loss of business while a building damaged in fire is restored. Some financial losses can be determined as soon as the loss occurs, but some take more time, like determining the liability.

Four types of Loss Exposures

  1. Property Loss Exposure: The possibility of a financial loss due to damage, theft, or loss of use of property that someone has a financial interest in. This property can be broadly categorized into two types: tangible property, a property with a physical form, and intangible, a property with no physical form.
  2. Liability Loss Exposure: This refers to a situation where an organization could become legally and financially responsible for injury, harm, or damage to another party. These exposures arise from the nature of an organization’s work and where it is executed.
  3. Personnel Loss Exposure: This refers to the potential risks associated with injury, disability, death, or departure of employees.
  4. Net Incomes Loss Exposure: This refers to the possibility of experiencing a financial loss due to increased expenses or decreased revenue. Events like the loss of a major customer reducing revenue, supply chain disruption making it difficult to produce goods resulting in losing sales, damage to reputation impacting the company’s reputation and leading to a loss of customers or natural disasters like floods, earthquakes, or fires disrupting operations and damage property, leading to lost income.
Table 2.3.1: Composition of Various Loss Exposure Categories
Loss Exposure Type Asset Exposed to Loss Cause of Loss Financial Consequences of Loss
Property Tangible, intangible, real, and personal property Perils such as lightning, fire, flood, and so forth Limited by the value of the property
Liability Money in the form of, for example, lawsuit-related damages, settlement costs, and legal and court costs The filing of a claim or suit seeking damages or some other legal remedy Theoretically limitless, but essentially limited to the total wealth of the person or organization being sued
Personnel The value that the key person adds to the organization Death, disability, retirement, resignation, and so forth Partial or total, as well as temporary or permanent. Depending on the circumstances and length of the departure
Net Income Future stream of net income cash flow Property, liability, or personnel loss; losses stemming from business risks Vary based on the cause of loss; the worst-case scenario is a decrease in revenue to zero and a significant increase in expenses for a prolonged period.

Commercial Insurance Policies

Several commercial insurances are available for organizations as a part of the risk transfer technique for Hazard Risk. These insurances are developed through regulations and common usage.

Following are some of the insurances available (Elliott, 2018).

  • Property Insurance
  • Business Income Insurance
  • Industrial All-Risk Insurance
  • Builders’ All Risk Insurance
  • Equipment Breakdown Insurance
  • Fidelity & Crime Insurance
  • Surety Bonds
  • General Liability Insurance
  • Auto Insurance
  • Workers Compensation & Employer Liability Insurance
  • Professional Liability or Errors & Emissions Insurance
  • Management Liability Insurance
  • Doctors & Officers Liability Insurance
  • Employment Practices Liability
  • Fiduciary Liability
  • Aircraft Insurance
  • Ocean Marine Insurance
  • Environmental Insurance

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Risk Management - Supply Chain and Operations Perspective Copyright © 2024 by Azim Abbas and Larry Watson is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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