Risk Identification and Analysis 62006

Risk Identification and Analysis for Small Public Entities
Claire Lee Reiss, J.D., ARM Public Entity Risk Institute
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GOAL
This presentation is based on Risk Identification and Analysis: A Guide for Small Public Entities, a publication of the Public Entity Risk Institute. Our goal is to help public entities analyze their risks and develop action plans to address them. The techniques discussed can and should be modified as needed to fit your entity.
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Resources
The manual for Risk Identification and Analysis is available for free download at www.riskinstitute.org, under Publications Tools and Resources. The direct link is here.
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www.riskinstitute.org
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What is Risk?
Risk is neither bad nor good. It is simply a measure of deviation from the expected. Risk consequences can be either bad or good:
Bad risk consequences drain resources and interfere with an entitys financial stability and ability to fulfill its mission. Good risk consequences produce better than expected results or unexpected opportunities.
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Some Sources of Public Entity Risk

A public entitys risks go far beyond insured losses.
Some risk exposures include:
Land use planning decisions Management of financial affairs/investments Changes in state or federal law Dependence on real estate tax base Changes in community economic conditions Natural and human-caused disasters
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What is Risk Management?

Risk management is the process of dealing with uncertainty and trying to achieve the best outcome possible for the organization. This process includes: Risk Analysis Identifying risks, analyzing potential consequences, and setting priorities for action Risk Response Developing and implementing an action plan to address risks
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Why is Risk Management Important?

An entity that analyzes and responds to its risks protects itself against bad risk consequences, and positions itself to take advantage of opportunity.
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You Dont Need a Risk Manager to Manage Risk

You do not need a designated risk manager to manage your risks. You do need: Strong involvement by upper management. An organized process for risk analysis and response. Assignment of specific risk responsibilities and performance accountability. A workplace culture where every employee understands risk and their role in addressing it.
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A Step-By Step Process for Addressing Risk
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Step 1: Establish Risk as a Priority

Upper management support is critical. Secure upper management support: employees will respond if they know risk is a priority for upper management. Communicate to employees about upper managements support for risk management.
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Step 1: Establish Risk as a Priority

Upper management support is critical (cont.)
Create and distribute a program mission statement that: 1. Defines risk as a priority for all employees. 2. Establishes a Risk Team to analyze and respond to risks. 3. Is signed by a governing board member and the chief executive officer of the public entity.
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Sample Risk Policy

[Name of entity] recognizes its responsibility to manage public funds in a responsible manner, which includes identifying, addressing, and appropriately managing any risks that may affect (1) the safety and well-being of its employees and citizens, (2) its financial stability, (3) its ability to achieve its mission of providing services to citizens, or (4) its ability to maintain an excellent community. [Name of entity] further recognizes that, as a public entity providing a wide range of services, it engages in operations that may carry significant risk, and that are also subject to disruption. Although risks are unavoidable, we consider no loss or interruption of services to be acceptable. Therefore, a Risk Team is hereby established and empowered to assess the risks that may arise from or affect operations and activities on behalf of citizens, and to make recommendations to the governing body or chief executive officer concerning those risks. All operations are required to cooperate with the Risk Team in this effort.
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Step 2: Designate a Risk Team Leader

The Risk Team leader drives the effort. The team leader bears primary responsibility for the risk program. A risk manager, or another employee with good organizational and communication skills and an interest in risk, would be a good candidate for this position.
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Step 2: Designate a Risk Team Leader

The Risk Team leader drives the effort: (cont.)
Team leader functions include: Determining the scope and goals of the project Developing a framework to follow Recruiting team members and managing team meetings Coordinating plan development and implementation Reporting progress to upper management
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Step 3: Define the Scope and Goals of the Risk Teams Activities
Defining the project The team leader defines the Risk Teams goals and the scope of its activities in writing, and distributes this document to upper management and department heads. If team members have already been selected (Step 2), they may participate in this effort.
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Step 3: Define the Scope and Goals of the Risk Teams Activities
Defining the project Include: The scope of activities: whether the project is entity wide, or will be tested in a few operational areas with high risks before proceeding to an entity wide plan. What the products will be. A risk action plan consistent with the scope of activities.
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Step 4: Create a Risk Matrix

Organize your thinking Create a preliminary matrix of your entitys risk exposures and the potential effects of risk on the entitys resources. Each cell of the matrix represents the effect a particular risk may have on important resources.
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Step 4: Create a Risk Matrix

A risk matrix 1) provides a structure for systematically analyzing risks, 2) stimulates thinking about rare events, and 3) helps you assemble and assign risk responsibilities to members of a Risk Team. When the specific areas of risk are identified, the group can delegate the areas to members for research. A sample matrix can be found here on PERIs website.
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Example of Risk Matrix

Risk Sources
State and federal laws Contracts and legal relationships Natural hazards
Essential
Changing laws can affect entitys tax revenues Contractors may try to shift risks of work to public entity Hurricane may reduce tax revenues by damaging area businesses
Resources
Americans with Disabilities Act requires special accommodations Unions of public employees may try to control terms of employment Hurricane may prevent public employees from coming to work
Financial Resources Human Resources
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Step 5: Recruit Risk Team Members

The Risk Team should: Be small enough to function efficiently Include enough members to carry out team activities Include members who are reliable and committed to the success of the Risk Team, and who have access to research resources, such as professional organizations, colleagues in other jurisdictions, and publications
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Step 5: Recruit Risk Team Members

The Risk Team should (continued): Include people knowledgeable about the entity and the operations included in the scope of the project: team members need not be risk experts Use committees of non-team members to provide needed expertise without making the team too large
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Step 6: Analyze Risks

Risk Analysis includes: Identifying risks Assessing potential risk consequences Setting priorities for action
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Analysis can be performed: By the team as a group Individually, analysis limited to area of operational expertise Individually, analysis includes perception of risks in other operational areas
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Analysis can be performed: (cont.) If individual analysis is performed by each team member, assemble the team as a group to discuss each members input and arrive at a consensus.
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Tools Risk Matrix to stimulate thinking Frequency and severity worksheets to record analysis of potential risks Samples are provided and are on-line and can be downloaded for free.
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Step 6: Analyze Risks Sample Frequency/Severity Worksheet for Natural Hazards

Resources Possible Effect on Affected Financial Resources Human Resources
Resources
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Frequency Comments and Severity or Potential Estimates Strategies

Insurance; Floodwall for vulnerable building
Uninsured Low frequency hurricane High severity damage to public property Employees unable to get to work due to hurricane damage
Low frequency Identify essential High severity employees and arrange transportation
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Identifying risks Use the Risk Matrix as a tool to stimulate thinking about risks and their possible effects on your entity. Use Frequency and Severity worksheets to record identified risks. (For assistance in identifying possible risks, go to Appendix C in PERIs publication Risk Identification and Analysis, online here on PERIs website.)
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Assessing potential risk consequences For each type of potential loss, estimate frequency and severity. Frequency: How often a loss is likely to occur Past loss records Information from colleagues, risk pool or insurance carriers Brainstorming
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Assessing potential risk consequences
For each type of potential loss, estimate frequency and severity. Severity: How bad cumulative losses of that type are likely to be (either financial losses or other interference with delivery of services to citizens) More subjective What is severe to a small entity may be less severe to a large entity with greater resources Consider both estimated size of loss and frequency
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More detail on severity analysis Estimate dollar losses when possible. For simplicity, assign high or low severity and frequency for each type of expected loss. To do so, consider:
Dollar value of expected loss Total losses the entity can bear without curtailing operations Governing boards risk tolerance Potential effect of a loss on the community serves
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Detail about variables to consider: Entitys ability to absorb losses - team members and the entitys financial staff can estimate the effect of losses on the entitys ability to continue operations.
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Detail about variables to consider (cont.): Governing Boards Risk tolerance - Losses are subjectively more severe of the governing board is uncomfortable about them. Effect on the community Events that do not directly damage the entitys property or produce liability, such as a severe economic downturn or a disaster, can reduce tax revenues.
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Reaching a consensus Have more than one meeting, if required, but avoid overly long meetings that prevent employees from performing their other duties. Perform additional research if needed. Keep everything objective as possible and avoid interpersonal conflict.
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Preparing a risk map A risk map segregates potential losses according to frequency and severity. It can be a useful visual guide to choosing the risks to address first, but is not essential. You can achieve the same purpose just making lists that correspond with the categories on the map.
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Preparing a risk map
Simple risk maps may include as few as four segments: High frequency/high severity, Low frequency/high severity, High frequency/low severity, and Low frequency/low severity. Use six segments - low, medium and high, for greater detail
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Step 6: Analyze Risks Sample Risk Map

Frequency
Low High Medium Low
Vandalism to city property
Severity
Medium High
Law enforcement liability claims
Severe earthquake
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Assign priority to risks Using your analysis, choose the risks you will address first, for example: Risks that may cause high severity losses, even if those losses are infrequent High frequency but low severity losses that can drain financial resources due to their cumulative cost
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Assign priority to risks (cont.) Risks for which there is an obvious, costeffective solution that can be easily implemented Risks that threaten the entitys public image and reputation
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Step 7: Risk Response

Create an Action Plan With its risk priorities in hand, the team can now gather to review the results and create a comprehensive action plan to address high-priority risks. Dont ignore the other risks, but direct your attention first to those that threaten greater harm.
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Step 7: Risk Response Four general types of risk response strategies:

Avoid Eliminate the risk producing activity entirely. Can be highly effective for some types of risk, but may not be practical for important government functions. Reduce Pre-event actions to reduce the frequency and/or severity of losses.
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Step 7: Risk Response Four general types of risk response strategies: (cont.)
Control Post event actions to keep resulting damages to a minimum. Transfer Shift some of the financial burden of a loss to another party.
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Step 7: Risk Response Develop the action plan:

Work with operational departments. Supervisors and employees will have good ideas about addressing their risks. An involved staff is also more likely to follow the action plan. Consider your entitys ability to implement strategies both financially and organizationally.
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Step 7: Risk Response Develop the action plan (cont.):

Brainstorm for ideas that will prevent loss events. Transferring losses and controlling the size of losses after they occur is your second line of defense. Identify the risks of loss that remain after you have implemented your action plan, and make plans for transferring or financing those risks. A consultant may be helpful when considering your options.
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Complete and circulate the action plan Assemble the chosen strategies into a risk action plan endorsed by the team leader and team members. Obtain endorsement of the plan by upper management and/or the governing body.
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Complete and circulate the action plan (cont.)
Share appropriate sections of the plan with department heads, departmental safety/risk committees, and other employees whose activities it affects. Prepare general information about the action plan for dissemination to the general employee population.
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An action plan can be a simple spreadsheet that includes the following elements:
Risk source Strategies selected Activities Target completion date Responsible person Actual date of completion Performance measures
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Implement, monitor, evaluate and modify the action plan: The team leader monitor the plans implementation and evaluates its effectiveness. The Risk Team continues to meet as a permanent entity semi-annually or more often to review the implementation of the action plan, and make changes as needed.
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The risk action plan is a living document and an on-going process: The key to a successful program is monitoring, evaluation and adjustment once the basics have been implemented.
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The risk action plan is a living document and an on-going process (cont.): If initially piloted in a few operational areas, the plan should be extended and reviewed in an on-going process.
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The risk action plan is a living document and an on-going process (cont.): The team should monitor changes in the entitys operations (identify new activities or operational areas, changes in the way operations are carried out) and modify the action plan to address new areas of risk.
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Conclusions
Dont ignore your risks just because you believe your entity is small or has insufficient resources knowing is half the battle. The process outlined here can be adapted to any organization.
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More Resources
For a more complete explanation of this process, as well as forms and checklists to help you implement a program, go to the Public Entity Risk Institute website, www.riskinstitute.org, and look under Publications Tools and Resources for a free download of Risk Identification and Analysis: A Guide for Small Local Governments. The direct link is here.
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Risk Identification and Analysis 62006

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Risk Identification and Analysis 62006

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Risk Identification and Analysis for Small Public Entities

Claire Lee Reiss, J.D., ARM Public Entity Risk Institute

Some Sources of Public Entity Risk

What is Risk Management?

Why is Risk Management Important?

You Dont Need a Risk Manager to Manage Risk

A Step-By Step Process for Addressing Risk

Step 1: Establish Risk as a Priority

Step 1: Establish Risk as a Priority

Sample Risk Policy

Step 2: Designate a Risk Team Leader

Step 2: Designate a Risk Team Leader

Step 4: Create a Risk Matrix

Step 4: Create a Risk Matrix

Example of Risk Matrix

Financial Resources Human Resources

Step 5: Recruit Risk Team Members

Step 5: Recruit Risk Team Members

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks Sample Frequency/Severity Worksheet for Natural Hazards

Frequency Comments and Severity or Potential Estimates Strategies

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 6: Analyze Risks Sample Risk Map

Law enforcement liability claims

Step 6: Analyze Risks

Step 6: Analyze Risks

Step 7: Risk Response

Step 7: Risk Response Four general types of risk response strategies:

Step 7: Risk Response Develop the action plan:

Step 7: Risk Response Develop the action plan (cont.):

Step 7: Risk Response

Step 7: Risk Response

Step 7: Risk Response

Step 7: Risk Response

Step 7: Risk Response

Step 7: Risk Response

Step 7: Risk Response

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