Cost Benefit Analysis for Risk Controls

Conducting a formal cost benefit analysis on the proposed control measures may be viewed as being unethical from a moral point of view. This may be so, where the tolerable level of risk was not determined with the involvement of both employers and employees alike.

The determination that the risk is at a tolerable level should be made in light of an adequate assessment of the probability of occurrence and an understanding of the severity of the outcome as well as the exposure levels anticipated. In addition, Government agencies' expectations and the public's perception typically should serve to reduce the tolerance for risk on any individual site.

Tolerable in this instance does not mean acceptable, it only refers to the willingness to live with a risk so as to secure certain benefits in the confidence that the risk is being properly controlled.

Guiding Principles

The cost benefit analysis should be conducted in the light of the corporate objectives. This should be guided by the following principles:

§ The risk management structure should not support an inappropriate measure of cost in relation to the cost of the loss events. The cost-benefit analysis should consider the impact of any loss in the earnings stream as well as direct losses.

§ The corporate risk aversion and suppression desire should be utilised to assist in the evaluation process.

§ The approach to the handling of risk should be an integrative process. Considerations relative to risk control and its management should form an integral part of the evaluation process.

By introducing the concept of the "cost-of risk", attention is focussed on the aspects of integration on optimisation. One should realise that this approach have a macro and micro impact. The macro and micro approach have a number of consequences as follows:

§ A longer-term view is necessary when determining the levels of expenditure on risk aversion

§ Risk control measures should be undertaken with the broader corporate financing objectives and constraints guiding the decision

§ The decision should be taken with due consideration of the social, safety, health, environmental and quality considerations measured against with a discounted cash flow of the cost of reducing the risk to a tolerable level..

Conclusion

At the conclusion of the design phases of workplace risk assessment an implementation schedule must be developed that not only include who is responsible and when the controls should be implemented but also what resources have been allocated to introduce the agreed upon control measures.

The evaluation of the cost benefit analysis and the making of a financially based recommendation is the critical outcome of this step of the process. This activity is best conducted by a financial person as it is primarily a financial evaluation.

© 2009 Carl Marx