Learning to Mitigate and Transfer

Mitigation and its meaning

According to the Oxford English Dictionary definition, the verb mitigate consists of making something less harmful or serious; other synonym, such as alleviate, is equally accepted for understanding. [1]

So then, it means that all the activities we refer to when we talk about mitigating an already identified risk, will precisely aim to reduce its threat and consequently the possible harmful effects.

As I mentioned in the previous article, eliminating a risk is the ideal action when it is feasible, does not alter or results in an acceptable alteration in the fulfillment of the goal or objective and/or when the cost of elimination is economically tolerable; however, in practice there are many risks that cannot be affordably eliminated (totally or partially); therefore, we will have to live with these threats, but seeking the greatest possible control and that is where the real work of mitigation begins.

Note: There are specialists and authors of books who allude that mitigation begins with the identification of risks and their classification, which I can agree with, because in these stages there is already awareness and intention to do something to protect the project or undertaking, however, for the purpose of being clearer with the reader of this article, I prefer to separate this stage to refer to the purest actions of mitigation.

Importance of mitigation.

Clear and effective communication to all those involved in the project or undertaking, regarding the set of risks that have been determined to be faced, is the best start.

Making these hazards and their consequences known allows multiple experiences of the participants to be heard and opens the door to the diversity of ideas towards the agreement of the most appropriate mechanisms to contain damages, and encourages creativity to mitigate.

Thus, the development of plans and strategies is at its peak in this phase, with the ultimate goal of keeping any setback under control, limiting its impact and maintaining the continuity of the business or project.

Therefore, the importance lies in managing to contain the inevitable, survive the unexpected and/or adequately manage moments of crisis, to prevent our enterprise from being seriously wounded or even dying due to factors beyond our control.

Let's get down to work

As this is a matter of the utmost technical and financial importance, we must act with the utmost professionalism in both directions.

There are many specialized services in the market to help us find the best answers in terms of risk mitigation, whether they are independent professionals, medium-sized consulting firms or large corporations; however, eventually hiring these services is only one option.

Secondly, there are research institutes, universities and even consulting firms such as those mentioned above, that can offer us basic courses, diploma courses and even postgraduate studies, so that our own personnel can learn the best mitigation techniques and strategies and thus, our company can become actively involved in the protection of what is most important to us.

A very important figure to take into account for our organizations or projects is the Risk Manager or Risk Administrator, who must lead, coordinate and manage the mitigation efforts, as well as create and maintain a “risk culture” around the protection values originally conceived by our organization; This culture must permeate among all personnel at all levels of the company, with the constant support of the highest levels of management, to ensure the soundness of these guidelines and thus maintain in the minds of each employee, the rules of prevention and protocols for action in the face of unfavorable events, with effective communication to other areas.

Constant monitoring and periodic evaluations, as well as drills, will help to detect vulnerable aspects and issues to be adjusted in the path of the project or undertaking.

Now you, dear reader, have a better overview on mitigation, but I invite you to investigate more on these issues and if possible approach the specialists, in order to land the ideas that best apply to your specific project.

Transferring Risk

We have reached the last of the actions, but one of the most important among the deck of options to protect our ventures, from the harmful consequences projected by each risk based on the results of our risk matrices (explained in my previous article).

Although risk transfer can be considered as part of the mitigation actions, I think that due to its relevance, it is well worth devoting a lot of time to this topic, and therefore I will make extensive comments later on and even write new articles on the subject.

Importance

I begin by saying that this is a strategic decision, especially in the financial area, since it seeks to avoid (totally or partially) the economic blow that an unforeseen damage usually inflicts on the owner and stakeholders of a project or company.

In other words, the consequences of a damaging event may range from the destruction or inoperability of material things, the affectation of people's health and integrity, the loss of image, prestige and/or confidence in the market and even delays in the fulfillment of commitments that lead to lawsuits or legal sanctions; All of these situations are already too much, both for the efforts to be made, the work to be done, and the time it will take to recover physically or remedy what is necessary to continue our business or operational mission, until we reach the point of normality.

On the other hand, but intimately linked is the economic aspect, that is to say, the cost of these efforts, works or remedies, the replacement of goods, the solution of problems, the payment of penalties, commercial and labor obligations, during the time it will take for the entire recovery; also included are the reduction of current and future profits, the alteration of productivity due to the total or partial suspension of the operational and commercial activities.

Therefore, it is precisely this second aspect to which the action of Transfer the Risk is focused, to the economic aspect and not so much on the direct material effects suffered, or better explained, it is the capital to face the consequences of the damage, the center of protection under this measure.

In conclusion, the importance of this action does not lie in the “what to do” or “how to do” materially to withstand or recover from a damage, but in the “with what to do it” (resources). Risk Mitigation measures and protocols (physical actions) in combination with Risk Transfer options (economic) are usually a successful mix.

How is it done and who to turn to?

This action implies agreeing and negotiating with another entity the acceptance of the possible negative economic effects derived from the eventual occurrence of one or several risks already foreseen, establishing rules or conditions and of course also stipulating a retribution in favor of the entity that takes those risks, as a reward for its courageous support.

The entities usually engaged in this activity are, as a rule, Mutual Organizations or Insurance Companies, Reinsurance Companies, Bonding Companies (or Surety Companies), Banking Institutions, Investment Funds or similar financial or welfare organizations, whose names may vary according to the legislation and customs of each country, and may also be public or private organizations.

In other words, there are several options in the market, so the choice is made according to the specialization of the risk to be transferred and the advantages offered by each entity, and of course also the cost of these services.

Only a few of these organizations offer non-profit services, commonly referred to as “mutuals”, which means that they are associations that fulfill a social function, normally for their members and/or a specific sector of the population that is vulnerable to certain perils (a guild, for example), for which the coverage they offer is limited; However, this does not mean that mutual insurance companies do not require contributions from their members; on the contrary, they are very necessary to fulfill their function, since they pool the economic funds contributed by all their members and thus meet the claims that may eventually arise, i.e., it is a matter of reciprocal assistance among the members (mutuality principle).

As for the rest of the options, we must understand that their services are offered as a direct business, or as an accessory of a different and larger (main) negotiation, therefore, here there is profit and it is up to us to negotiate well.

It is important to know that although these entities are dedicated to the acceptance of risks and speculate with them, they are not necessarily obliged to take them of any kind, nor of all the people who present them, on the contrary, they are normally very selective, because as already said, the cases they take must represent a business and not obvious claims that end up bankrupting these entities.

On the other hand, as is to be expected, the costs of these services (premiums) increase the higher the risk taken by these entities, but they can also be contained and even reduced if it is shown that the person transferring the risk has efficient monitoring and control systems, as well as a good mitigation program.

The most common

Here we must also differentiate them, according to the two large groups of risks that I have pointed out since the first of these articles:

A) For Natural or Involuntary Risks, Insurance Companies are the most diverse and popular option that we can find in the market, since there are them for countless risks, but for practical purposes of distinction we can group them into:

- Life & Health Insurance Companies

- Auto or Vehicle Insurance Companies

- Property and Casualty Insurers

- Credit and Financial Guaranty Insurers

In turn, these groups can be subdivided into other classifications, according to the special risks they address and products they offer; but that will be the subject of another article.

Benefits: Despite being a business, these entities fulfill an important function for society and with a good touch of nobility, as they are able to back up in the face of devastating and substantial catastrophes of their clients (private or government).

In addition, Insurance Companies make their own risk analyses and calculations with professional experts in measuring probabilities, impacts, and generate valuable information from which their clients can take advantage of for prevention work; many of these institutions also offer inspection visits, audit-type exercises, control services, follow-up programs, among other activities that result in the security that their clients must implement, all situations that add significantly to our Mitigation actions.

B) For Risks with the Will of the Individuals, the most popular option for transferring this type of risks, which are linked to the behavior of individuals or entities and with respect to the fulfillment of their obligations, whether legal or consensual (agreements of will), are the Surety Companies or also called Bonding Companies (depending on each country).

On the other hand, Banking Institutions usually also offer products for this block of risks, with their respective differences in costs and benefits.

There is much to be said about these other institutions, their activity and the benefits they provide, however, as this is a very broad and special subject, I will discuss it in detail in my next article, so I invite you to continue reading me.

Conclusions

Both, Risk Mitigation and Risk Transfer are very important actions in the care of our projects or ventures, but above all, combining both is when the best results are obtained when facing a relevant risk.

In addition, there are many benefits that we can obtain from such implementations, knowing what kind of professionals or entities we should turn to, as the case may be.

By: Joel López Téllez

October 1, 2024

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[1]Cf. OXFORD UNIVERSITY PRESS:?Oxford English Dictionary, [On line version]. <https://www.oxfordlearnersdictionaries.com/us/> [01/10/2024]