Risk Decision Matrix
Plot your risk. Choose the treatment.
Risk is uncertainty of financial loss.
Not every risk should or can be insured.
Your approach to risk decisions becomes key.
And a proper risk advisor becomes even more key.
The Chadwicks Risk Approach
The practical way to decide what to insure, is to plot your risks through frequency and severity.
Risk Frequency
How often is the risk likely to happen. The “Risk Frequency”.
Risk Severity
How bad the financial impact would be if it does happen? The “Risk Severity”.
On a high level, plotting your risk against these two variables creates the four risk zones below. Each risk zone has a different risk treatment approach.
The risk square
Severity
Frequency
Risk Zone 01
Low Frequency + Low Severity
These are small, infrequent losses that you should retain or self insure. Insurers usually use excesses as a mechanism to discourage claiming for negligible losses.
Examples
- minor damage to assets (small dents)
- one off low value courier or parcel damage
- replacement of a single low cost tool or electronic device
- small accidental damage to non critical equipment
- infrequent low cost repairs that have no material financial impact
Risk Zone 02
High to Medium Frequency + Low to Medium Severity High Frequency + Low Severity Medium Frequency + Medium Severity
Attritional Risk deals two different kinds of loss.
Click either half of the square to read it on its own. Click the highlighted half again for the overview.
Minor Attritional Risk
These are best absorbed by you. They are not recommended for insurance transfer, as the more you claim, the more you pay.
Major Attritional Risk
Medium is the key word here. These losses fall in between Attritional Risk and Catastrophic Risk and should be considered for insurance risk transfer.
Minor Examples
- Minor Petty theft
- Minor motor losses
- Minor transit and couriers losses
Major Examples
- Major employee fraud and theft
- Major theft losses
- Major motor losses
- Major insured loss of key staff
- Major computer and electronic loss
- Major machinery breakdown and plant loss
- Major transit losses
Risk Zone 03
Low Frequency + High Severity
Catastrophic Risk. The insurable financial losses that are business threatening and must be transferred to an insurance policy.
Examples
- fire and natural perils
- business interruption
- liability claims
- engineering or construction losses
- machinery breakdown with long downtime
- cyber incidents
- riot, strikes and public disorder
Risk Zone 04
High Frequency + High Severity
These are systemic and product or workmanship guarantee risks that are uninsurable. Without insurance, the business is unlikely to remain financially viable as a going concern.
Examples
- repeated major product defects
- systemic fraud or high frequency large scale crime
- ongoing serious safety failures
- repeated large liability events
- any loss with a high frequency and high severity probability
The diagrams below show how common business risks fall into these risk zones.
Insurable Risk
Risk Zone 02
Low Severity Risks
Potentially Non Business Threatening | High frequency
This must always be carefully considered under all Risk Zones.
Risk Zone 02 in particular has risks that may not be Low Severity, High Frequency and they may well fall into Risk Zone 03, High Severity, Low Frequency. Only proper Risk Profiling can determine the correct Risk Zone. In practice, there is often a grey area between Risk Zone 02 and Risk Zone 03 and in some ways, a Medium Risk Zone in Risk Zone 02 represents the extent of the potential financial loss of certain risks better.
Examples include Employee Theft, Motor, Electronic, Transit and Machinery Breakdown.
Insurance
Is dependent on the severity of a loss and whether the loss is business threatening.
Risk Zone 03
High Severity Risks
Business Threatening | Low frequency
This must always be carefully considered under all Risk Zones.
All the risks identified in Risk Zone 03 must be transferred to insurance. Partial risk transfer or failure to transfer at all is business threatening.
Examples include Fire and other natural events, Business Interruption and Liability.
Insurance
Is essential to ensure business continuation.
Most of what clients instinctively want to insure are found in Risk Zone 02.
The risks that really threaten the survival of the business itself are found in Risk Zone 03. Insurance is fundamentally designed for Risk Zone 03, those serious residual risks that remain after proper risk management has been treated by risk professionals.
Risk Zone 4 are risks that point to a business not being financially sustainable as a going concern, as they cannot be transferred to insurance, absorbed or self insured.
