Risk Management Audit refers to the process of assessing and analyzing the risk and suggesting the improvement measures to be adopted for better management of Risk. Risk Management Audit must be performed by experts in the field who have adequate knowledge and expertise in perception of different types of risks and hazards and give suggestions to the client, the measures to be adopted to improve the risk.
Risk Management Audit may be conducted at the stance of Insurance Co. or the insured himself.
Risk Management Audit may be conducted in the following stages :
- At the time of taking insurance cover
- During the continuation of Insurance
- At the time of claim.
Time of Cover : When the Insured proposes for taking a insurance cover the insurance company should conduct a risk management Audit of the risk proposed to be underwritten. The purpose of such audit will be to have a detailed idea about the risk to be insured so that the insurer may levy appropriate rate pertaining to the risk.
The Risk Management Auditor will primarily focus on the following factor :
- Location of Risk
- Type of Risk
- Adjacent Hazard
- Susceptibility of Subject matter of risk
- Maintenance and upkeep
- Safety Measures adopted
- Process of Manufacture.
- Storage of subject matter.
- Condition of Electrical Installations.
10. Disposal of Waste & Scrap.
11. Natural Calamities prone to area.
12. Previous history of loss.
13. Overall layout of plant.
14. Accessibility of Fire brigade.
15. Training to employees for averting disaster.
16. Safety Manual.
17. Identification of disaster recovery location.
18. Maximum Probable loss
19. Concern of top management towards safety.
The auditor will study all the above points detailed above and prepare a report taking into account all the above factor.
The study can be conducted by the following methods :
Observation
Personal Interview
Questionnaire
Documents & Records
Observation : The auditor may observe personally each and every process of manufacture, location of plant, hazards, etc. This will give him the idea of the proposed risk being assessed very closely.
Interview : He may actually take interviews with the persons at the helm of the affair to know their view about the nature of risk, safety measures adopted, their experience in handling risk etc.
Questionnaire – The auditor may frame a questionnaire and ask the person incharge to reply to the question. He will then analyse the questionnaire according to the requirement.
Documents & Records : Documents will help the auditor to have a clear picture about the risk which is being inspected. Auditor may call for the past record to study the details of insurance taken earlier, loss suffered the reasons of losses, corrective measures taken to stop recurrence of losses.
After conducting the audit the Risk Management auditor will compile all the information collected and shall submit a comprehensive report of risk to the insurer. The insurer on the basis of report will decide whether to accept or reject the risk. If risk is accepted then subject to what terms and conditions.
Many times insurer may accept a risk proposed for insurance with some exclusion.
Insurer may also accept a risk subject to fulfillment of certain conditions by the insured. If there are any deficiency at the location of the risk the insured may be asked to improve the condition of risk. If the conditions as proposed by Insurers are not complied with them either insurer may load the insurance rate, or exclude some risk or may altogether reject the risk.
Continuation of Cover : The Audit may also be conducted during the continuation of the insurance cover. In case of Mega Risks where the stake of Insurance Company is very high and the insured property is of hazardous nature the insurer may conduct audit during the course of cover.
In this case the Risk Management Auditor must study the current status of risk. He should specially note whether there has been any deterioration in the risk hazard since the time the insurance was granted.
If there is any deterioration, what will be the possible impact on the insurer if any disaster strikes. He should also list out improvement measures that can be adopted by the insured for improvement in the condition of risk.
The insurer on receipt of report will decide whether to revise the rate mid term or continue with the policy till expiry. If the risk is very grave the insurer may also think to cancel the policy prematurely.
Audit at the time of loss :
The audit will be basically conducted by the surveyor and the Loss Assessor. The purpose of this audit will be to find out :
- Amount of loss.
- Genuinety of Claim.
- Causes of loss.
- Salvage.
- Extent of Damage.
- Efforts made by insured to prevent loss.
- Market Value of property lost.
- Reinstatement Value of property.
- Depreciation of property due to use.
- Details of other insurance i.e. co-insurance.
Based on above factors the surveyors should submit his report to the insurers stating the following :
- Whether the claim is payable or not.
- Amount payable.
- Depreciation to be deducted.
- Risk Management Measures that must be adopted by the client to improve the condition of risk during the continuation of insurance cover.
- Steps to be taken by insured from preventing further recurrence of loss.
The Risk Management Audit will be beneficial both for the insurer and the insured to prevent the loss, minimize the impact of any disaster and reduce the amount of loss even if any disaster strikes.
