With the record breaking and devastating wildfires in California, private fire protection services are becoming more visible. These services are offered by insurers, such as AIG and Chubb, to add an extra layer of protection to their high value insured properties. Much of the media seeks to vilify the “rich” for engaging in this practice. However, as any of us would, we merely use the tools at our disposal to reduce our exposure to loss.
BusinessDictionary.com defines risk as, “A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action." This definition, as it applies to the insurance industry reads, “A situation where the probability of a variable (such as burning down of a building) is known but when a mode of occurrence or the actual value of the occurrence (whether the fire will occur at a particular property) is not.”
The most succinct definition of risk comes from NFPA 1250, “a measure of the probability and severity of adverse effects that result from an exposure to a hazard”. NFPA 1250, Recommended Practice in Fire and Emergency Service Organization Risk Management, provides this definition of risk, and outlines risk managements plans and processes that should be implemented by fire departments. Understanding that risk is an inherent part in our daily duties, there are five techniques that can be employed to manage or control this risk.
- Exposure Avoidance
- Loss Prevention
- Loss Reduction
- Segregation of Exposures
- Contractual Transfer
Loss Prevention. This is the use of methods and measures to reduce the probability of a loss from occurring. These can include inspections, audits, or training programs.
Loss Reduction. Theses are measures used to reduce severity of loss, even if engaging in a high risk activity. A good example would be the use of PPE when entering a structure fire. This would also include post-accident/loss activities, procedures, and processes.
Segregation of Exposures. This could also be a loss reduction tactic. This is accomplished by breaking large units into smaller ones, and distributing equipment and resources, throughout a large area. This reduces the likelihood of a total loss if all items, personnel, resources were to be located in a single area.
Contractual Transfer. This is the use of a formal insurance policy. This is affected by the transfer of responsibility from one entity to another.
These five methods of risk management are defined and outlined in NFPA 1250. The insurance industry, however, would add one additional method to the list - retention.
Retention. This is when an organization acknowledges that there is a risk, and prepares for the loss (financially and physically) themselves. They are self-insured, which simply means that they control all the money, instead of an outside or third-party “insurance company”.
