Risk Management: Public Sector Loss Financing Schemes - Essay Example

Public Sector Loss Financing Schemes Two examples financing schemes available for the public sector are insurance products, which is the most common; and captive insurance, a form of alternative risk transfer. Insurance is a form of risk financing that transfers potential loss associated with the risk to a third party. Defined as a legal contract that protects people from the financial costs arising from loss or damages, it provides individuals and organizations with the ability to replace the risk associated with uncertainty, with known costs of buying insurance. Captives, on the other hand, is a special type of insurance company set up by a parent company or group of companies to insure the risks of its owner or owners and risk-retention groups, in which entities in a common industry join together to provide members with insurance. Unlike traditional insurance companies that avoid insuring certain types of risks and can place prohibitive premiums and excesses on its customers; captives can be more tailored and customized to the needs of the insured company. Costs are also unbundled and more transparent in the captives market. Furthermore, captives can also return underwriting profit and investment income back to the owner, whereas traditional insurance companies retain these earnings as profit. Bureaucratic Control The statement only holds insofar as the system of control is dysfunctional. Bureaucratic controls, created to reduce uncertainty within organizations, can be an effective means of controlling human behavior if the controls or standards placed are within the acceptable range of control. Thus, the correct amount of control can lead to the attainment of an organization’s goals and objectives. However, a dysfunctional mode of control can lead to what the statement refers to as “greater unintended consequences”. Too much control, for example can lead employees to defy, manipulate, or simply ignore the control. Too little or no control, however, might encourage employees to be negligent or careless. Furthermore, if the control is unfocused, employees might end up misinterpreting them, leading the organization to fail in achieving its goals. Bureaucratic controls, therefore, can reduce risks if implemented properly; but it can also increase it if the wrong controls are chosen. Since human beings always have actions that lead to unintended consequences, it is impetrative that in instituting bureaucratic controls, the correct amount of control is used and the controls implemented are focused, complete, flexible, and reasonable to ensure that members of the organization react positively and follow them, thus reducing uncertainty. Latent Pathogens Are factors that unconsciously cause individuals within an organization to commit errors that can lead to a tragic sequence of events characteristic of an accident. They may lie dormant or undetected for long periods of time before eventually causing human error. For example, in an airline accident, overwork among crewmembers can lead to fatigue and ultimately errors in the cockpit. From this perspective, the hazardous acts of crewmembers are the end result of a long chain of causes whose roots originate in other parts of the organization. Examples of such are fatigue, illness, complacency, carelessness, loss of awareness, and forgetfulness. Nertney Wheel Behavioral Incentive Model An antecedent is a part of the Antecedent-Behavior-Consequence (ABC) model to get behavior started. Sometimes referred to as an activator, it is something that occurs before a certain behavior because it prompts human beings to take action. Examples of antecedents include policies, goals, directives, announcements, training programs, procedures, vision statements, and so forth. They “set the stage” for a work-behavior or performance to take place, but they do not guarantee that it will occur. Although managing on antecedents may work, it is not the most efficient way to manage behaviors, actions or tasks of employees because different people react differently to antecedents. Effects on Behavior Reward: (Immediate) Increases the possibility that behavior will occur more frequently in the future. The rate or frequency of the “rewarded” action increases in a positive way. Reward (Delayed): Decreases the possibility that the behavior will occur more frequently in the future. It may even lead to extinction if delayed rewards take place often. Punishment: (Immediate): Punishment leads to fear and will stop the behavior from continuing. Punishment: (Delayed): Decreases the possibility that the behavior will stop. The longer the time between the completion of a behavior and the delivery of a reinforcing consequence, the less effective the punishment will be. MORT Is a variation of fault tree analysis used to identify the underlying cause of a deficiency, or set of deficiencies, and to identify the problem, or problems. It is often used for accident investigations to correct what has been damaged. But, it should also be used to anticipate and prevent future occurrences. Force Field Analysis A method used to analyze all the forces going for and against a particular plan/decision. It allows one to identify and weigh the importance of these forces in affecting the viability of a plan before it is implemented, assessing whether it is worth implementing, or make changes to improve it if it has not been implemented. Mishaps A mishap is the end result of a series of errors made throughout a chain of command. They cannot be attributed to a single cause a single individual. Instead, they are the end result of a myriad of latent and active failures, which could have resulted due to actions or inactions of individuals within a chain of command. These individuals could be members of a crew or team, supervisors, or even the organization’s executive branch who may not be present when the mishap occurred. Therefore, causal factors at all levels must be addressed to determine the reason for mishaps. Case Study 1 The purpose of this essay is to present an appropriate and effective risk management plan for the public sector through “Integrated Risk Management.” Integrated Risk Management refers to a comprehensive approach in dealing with the risks faced by policy makers, government agencies, and other parties within the public sector. It builds upon the notion that managing risks at the individual activity level or functional silos is no longer sufficient due to the interconnection between risks that public agencies face. Hence, taking a continuous, pro-active and systematic process to understand, manage, and communicate risks from an organization-wide perspective, integrated risk management presents a holistic and embedded strategy of managing risks. It requires an ongoing assessment of potential risks for an organization at every level and then aggregating the results at the corporate level to facilitate priority setting and improved decision-making. It incorporates risk management both horizontally and vertically into organizational policies, plans and practices. Horizontally, results are considered in developing organization-wide policies, plans and priorities. Vertically, functional units, such as branches and divisions, incorporate results into programs and major initiatives. This management plan also takes into account both the internal and external environment that affect policy-making. By looking outward and across the organization as well as at individual activities, this comprehensive approach to managing risk is intended to establish the relationship between the organization and its operating environment, revealing the interdependencies of individual activities and the horizontal linkages. It also supports activities that foster innovation, so that the greatest returns can be achieved with acceptable results, costs and risks. To develop an effective risk management plan for the public sector it is important to understand the unique facets inherent in the public sector. First, that the “public” element is present in all aspects of decision-making. All aspects of decision-making in the public sector take into account the notion of “public”. This implies that certain factors, such as communications and consultation activities, legal considerations, and ongoing operational activities, require active consideration at each stage of the process. Decisions, therefore, are never made in isolation. Second, that public goods are different from private goods, such that they are non-competitive and non-exclusive. Hence, public goods and services are only, appropriately provided by government agencies, making citizens dependent on such agencies for all public goods. And third, public sector agencies have an “embedded” bureaucratic culture already in place. This bureaucratic culture, because of its “embeddedness” within the organization makes it difficult to instill changes that are superficially affixed to the organization. Based on these characteristics inherent within public agencies, implementing an Integrated Risk Management approach is the most appropriate and effective plan for the sector because: (1) An integrated Risk Management plan is cost-effective – it eliminates the need to make a separate analysis for each functional silos or organizational level making up for the fact that governments and public agencies, in particular may have limited resources. (2) It is more systematic and comprehensive. It allows risk managers to account for external and internal risks without losing focus. All relevant information decision-makers need is made available to them. Thus, losses and risks are minimized. (3) It takes into account the “bureaucratic culture” in the public sector. It encourages the development of a risk sensitive workforce making sure that changes that result from the management plan are not superficially affixed to the organization but embedded within the bureaucratic culture. Allowing for greater efficiency and efficacy in implementing the risk management plan. (4) It allows for innovation and improvement. It does not stop at simply minimizing and mitigating risks; instead, it takes into account how public agencies can take advantage of opportunities. This is important in the public sector because it allows for more efficient and effective service delivery. (5) It encourages active participation from employees and citizens alike. In terms of the employees, because their views and concerns are now given importance in the decision-making process, they can be more proactive in dealing with company policies. In terms of citizens, because integrated risk management improves transparency within an organization, participation will be encouraged. (6) It strengthens accountability and provides transparency for stakeholders. Stakeholders will have a better grasp of the state of the organization, allowing them to come up with more informed and confident decisions. (7) Improves results. It improves decision-making within the public agency by allowing decision makers to make more informed decisions that are more responsive to citizen’s needs. Integrated risk management, therefore, is the appropriate management plan for a public agency because it ensures that all decisions made within an organization are well thought of, well informed, transparent, and actively managed. Furthermore, it ensures that through an effective assessment of risks, all opportunities for the organization are also spotted to allow for improvements and innovation within the organization. Case Study 2 Perhaps the most dynamic and unpredictable among the risks within a company’s operations is that which stems from employees of the company, as it was illustrated in the case of New Generation Agency. In an interview with the Coordinator of the agency’s ­Be Green and Clean program, the company received adverse publicity from the media, incurring losses for its stakeholders. The relevant stakeholders that were affected by such incident are: the company’s investors, strategic partners, customers, the local community that benefit from its projects, and the company’s employees. First, the investors and strategic partners of the company would have incurred financial losses as a result of the incident. Furthermore, in the case of its strategic partners, which would include their sponsors for the program, the government agencies that they might be working with, and other high profile personalities that they may have invited to support the program, a potential loss in their reputation might result from the adverse publicity due to their connection with the company. Second, in the case of its customers and the local community, the adverse publicity could potentially lead to fewer programs and events that would benefit them in the future. Third, the other programs of the company will also be affected in terms of lost reputation, and a possible withdrawal of its partners and sponsors from their respective projects. Fourth, the company’s owner will in turn suffer from lost profits and reputation, and consequently a lost in partners and sponsors for its future programs. In the case of the employee, particularly the coordinator of the program, his losses would include a loss in reputation, both in the public eye and within the organization, a possible failure of his program, and the possibility that he may not be entrusted with high profile programs in the future. The other employees, on the other hand, might lose confidence with the company and leave. These are the losses that will have resulted from such adverse publicity. In determining the aforementioned lost opportunities and potential losses, a matrix approach was utilized where the risks were listed in the columns and stakeholders were listed in the rows. Due to the losses incurred, however, a need to formulate a strategy for risk minimization must be formulated. In this case, the media will be utilized to achieve such. First, the Coordinator of the program must appear again in the media through a press conference and read a prepared statement accounting for the events that resulted in the adverse publicity. The statement must also explain that the treatment of the previous media appearance was misrepresented leading to the adverse publicity. In addition, the statement must provide assurance to the program’s customers and the local community involved that all of the program’s projects and activities will carry on as previously planned. Second, the company’s owner, together with the coordinator, must then set meetings with its investors and strategic partners to explain the event and ensure them that the company and its programs are functioning well. Third, the company should also set-up a hotline for possible complaints and questions that arise as a result of the incident. The personnel who will work for these hotlines must be well trained to address the issues and assure its callers about the company and its programs. Fourth, the company should also embark on a more aggressive marketing campaign to reinforce a positive image for its programs, and possibly even increase its customer base. Fifth, the company should start building relationships with other possible strategic partners in order to balance the possible loss of strategic partners that may occur due to the incident. And last, the company must develop a training module that will be used to train its employees regarding encounters with the media. As evident in the previous paragraph, the risk minimization strategy employed by the company is focused mainly in minimizing reputation loss. Although the financial losses that result from the adverse publicity is of importance, the loss in reputation is more “priceless” for the company because leaving it unsettled will cause the company more losses in the future. This strategy is focused on an aggressive marketing plan to rid the company of any negative image that might have resulted from the incident. Conversely, it also focuses on reinforcing the company’s image through advertising and appearing in the media. The case of the New Generation Agency, therefore, presents an event where media played a crucial role in creating losses and lost opportunities for the company, while at the same time serving as the tool for minimizing them as well. Furthermore, it also emphasized the importance of reputation for a company where its loss can lead to numerous problems and further losses; hence, stressing why reinforcing a positive image and utilizing marketing strategies are important for a company. Read More