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Risk management protects people, property, and inventory. For example, factories that use hazardous chemicals require employees to wear protective clothing; department stores use closed-circuit surveillance to minimize shoplifting and vandalism; and manufacturers have a plan of action to follow should their products injure consumers. The five general categories of risks are:
Risk managers first identify and analyze potential losses. They examine the various risk management techniques and select the best ones, including how to pay for losses that may occur. After the chosen techniques are implemented, they closely monitor the results.
Risk management has two basic elements: risk control and risk finance. Risk control involves loss prevention techniques to reduce the frequency and lower the severity of losses. Risk managers make sure operations are safe. They see that employees are properly trained and that workers have and use safety equipment. This often involves conducting safety and loss prevention programs for employees. They make recommendations on the safe design of the workplace and make plans in case of machinery breakdowns. They examine company contracts with suppliers to ensure a steady supply of raw materials.
Risk finance programs set aside funds to pay for losses not anticipated by risk control. Some losses can be covered by the company itself; others are covered by outside sources, such as insurance firms. Risk finance programs try to reduce costs of damage or loss, and include insurance programs to pay for losses.
Risk and insurance managers help companies choose programs to minimize risks and losses due to financial transactions and business operations. For example, companies may incur costs because of a lawsuit against another company, or have to make disability payments to an employee who was injured on the job. Insurance managers help companies obtain insurance against such risks. Risk managers use techniques such as hedging to limit a company's exposure to currency or commodity price changes. Risk managers who specialize in international finance create financial and accounting systems for the banking transactions of multinational organizations. Risk managers are also responsible for calculating and limiting potential operations risk, such as a disgruntled employee damaging the company's finances or a hurricane damaging a factory.
Large organizations often have a risk management department with several employees who each specialize in one area, such as employee-related injuries, losses to plant property, automobile losses, and insurance coverage. Small organizations have risk managers who may serve as safety and training officers in addition to handling workers' compensation and employee benefits.