Fundamentals of Risk Management

Risk strategy
272
sets out to describe what can go wrong in relation to the hazard, and the considera-
tions and the issues that need to be evaluated. The control options that are available 
in relation to that particular risk are considered, followed by consideration of the 
controls that are necessary and appropriate.
Table 16.2 provides examples of the four types of controls described in Chapter 16 
as applied to two types of hazard risks. The examples of fraud and health and
safety are selected, so that the application of different types of controls to these two 
hazards can be illustrated. For other hazard risks not listed below, a similar generic 
approach can be taken and the types of controls that are possible can be listed, using 
the format of preventive, corrective, directive and detective controls.
When selecting and implementing controls, it is important to ensure that cost- 
effective controls are selected. Figure 23.2 plots increasing the level of control
(horizontal-axis) against both the increasing cost of controls and the reducing potential 
loss (vertical-axis). By adding the total cost of controls and the equivalent potential 
loss for each level of control, the figure illustrates that there is an optimum level of 
control that represents the lowest combined cost as a sum of the cost of control and 
the level of potential losses.
FIgURE 
23.2
Cost-effective controls
Cost-effective
controls
Judgement
required
Further controls
not cost-effective
Total cost of
risk
Potential
loss
Increasing
cost
Improving
control
Cost of
controls

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Control of selected hazard risks 
273
It can be seen in Figure 23.2 that a significant reduction in potential loss is achieved 
with the introduction of low-cost controls. This section of the diagram is labelled ‘Cost-
effective controls’. The centre section of the diagram illustrates that spending more on 
controls achieves a reduction in the net cost of risk up to a certain point. In this segment, 
judgement is required on whether to spend the additional sum on controls. On the 
right-hand side of the diagram, spending more on controls achieves only a marginal 
reduction in potential loss. In this segment, further controls are not cost-effective.