Risk management

GOOD PRACTICE

Does risk management pay?

Firms often ask whether taking the time and expense to improve risk management pays dividends.

They perceive that many of the recommended measures involved in analysing risk, and then working out what to do to reduce it, will take time.

Firms will need to arrange meetings involving all levels of staff on a regular basis to discuss risk, workloads, problem files, appraisals or performance reviews, peer reviews, complaints and claims records.

The list could be endless.

Mental effort is required to think about operational risk, and to accept that significant changes of behaviour may be required to reduce risk.

A fee-earner may need to accept a supervisory role or adjust to the idea that a senior member of staff might need a measure of supervision.

All this time spent on risk management reduces the amount of chargeable time and therefore fees.

And then there are actual outgoings - investment in good diary and case management systems, training and development for staff in risk awareness and client care (as well as the usual legal updates) and possibly extra staff, such as a risk manager, or better qualified staff to ensure you can deliver the level of service needed to avoid claims.

How can a firm run a profitable business if the expense of risk management is so high? On the other hand, the question is increasingly how can a firm run a business without a risk management policy, since the cost of a poor claims record is so high?

The cost of claims is enormous.

A firm will have to meet the excess before an insurer steps in.

Dealing with the claim will take up the time of a senior member of staff, and sometimes to the exclusion of all other work.

The firm's reputation will suffer and there is the potential cost of losing business as a result.

However, above and beyond this is the cost in terms of insurance premium loading and the consequence of finding no insurer willing to provide cover.

Even for firms with good claims records, the cost of insurance is one of their highest expenses.

Firms with poor records will find it increasingly difficult to find cover at a price that is affordable.

Risk management may not completely eliminate problems, but a positive and planned approach to risk will reduce the likelihood of claims, and over a period of time will result in a reducing claims record.

Underwriters are looking carefully at the level of risk management within firms and simply will not quote unless they are happy with the current level of risk management in place.

So risk management pays, and it is well worth the investment of time and effort.

This column was prepared by Alexander Forbes Professions, a division of Alexander Forbes Risk Services UK