Managing Future Risks of Tornado

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Table of Contents

Introduction
Direct Losses
Indirect Losses
Maximum Loss
Risk Management Tools

Introduction

The following is a management report based on analysis of a case study of a bank in Texas, Fort Worth where tornado hit in the year 2000. The analysis will also discuss the types of losses experienced by the bank both directly and indirectly. There is recommendation on various kinds of tools applied by the bank manager to manage future risks of tornado.

Direct Losses

The first loss experienced by the bank is business interruption, as the property from where the business operates had to close because of the tornado. This meant that the business operations had to stop before finding alternatives. Business interruptions affect the normal operations of the company such that the company cannot make the anticipated profits because they are not providing services to the customers.

The other direct loss experienced by the bank was the loss of documents left in the closed building. The loss of these confidential documents such as the customer accounts may lead to a bigger loss as there is no clear record to verify and ascertain clients’ information. The documents are important part of the business since replacing the information may not be easy. The other direct loss incurred by the company is the damage on the bank property. While the building does not belong to the bank, the furniture as well as computers belonged to the bank and they were some of the destroyed materials belonging to the bank.

Other than loosing the business support assets, the business lost its time. The bank had to close and seek alternatives to ensure that normal operations resume. This made the bank to inconvenience clients who needed their services at that time.

Indirect Losses

Apart from the direct losses, the bank also experienced indirect losses that did not come immediately but they are nonetheless losses accrued from the disaster. The first loss is that of the office space as the company had six hundred employees in the damaged location and the new offices in the remote place could only accommodate half of the employees.

The other indirect loss is inefficient operations because holding meetings was a challenge as the previous building had space and venues of holding meetings. This made transactions and communication a challenge leading to inefficient operations. The other challenge from the loss is that the company incurred expenses of leasing additional offices for the staff in different locations. These were unanticipated expenses, which made the company operations difficult.

Termination of the lease by the owner of the building is a double loss where the company has to lease another property and the costs are twice the previous expenses. Indirect loss would be in the cost of transferring goods from the previous location to the new location. The cost of shifting to another location is higher than the cost of repairing the damage.

The other indirect loss incurred is that of having to use shuttle services to transport the employees to the remote location. The loss involves paying workers who are in different locations additional transport allowance to enhance their work in the offices, which are in different locations. When employees reside near the offices transport cost is reduced which increases the profit margin.

Maximum Loss

In case of maximum probable loss that may have occurred additional losses would be loss of lives of the bank workers, forcing the company to incur compensation costs for the workers. In addition, the bank would have experienced total damage of the documents and the equipments. This would make the company liable for the losses incurred by its clients. The payments of liability would be a great loss to the bank and would affect the bank negatively.

Risk Management Tools

The following are ways in which the bank manager can use risk management tools to ensure that such disasters do not result into huge losses to the company. The first tool is that of risk retention, which refers to the situation of acknowledging risk but the long-term costs of insurance are higher than the loss incurred. Since tornadoes happen most of the times, the company can have its mechanism of retaining the risk by having a separate fund to cater for such emergencies when they occur.

The other risk management tool that the manager can use to contain the losses of such occurrence is risk prevention. This refers to a situation where the company identifies the loopholes, which may lead to loss and instituting measures to avoid that loss. Such measures include having an electronic filing systems and a different database away from the bank for storing information. In addition, buying damage proof equipment or insured equipment is a loss prevention mechanism.

The loss reduction method of risk management involves reducing the loss that is in form of liabilities or lawsuits from clients because of the damages they have incurred. Loss reduction ensures that the company has policies of risk sharing which makes it impossible to sue the bank for inefficiencies arising from a disaster.

The other risk management method regards insurance, which helps to put the company back to the initial financial position before the loss occurred. This is where the bank buys the appropriate insurance cover to ensure that the company can be compensated from the likely loss of property and profits. The bank’s risk manager needs to buy insurance policy to cover the company from the loss of property.

The other risk management tool is risk transfer. The bank can adopt risk transfer measure to ensure that loses are transferred to stakeholders other than the bank itself. This can only happen in an agreement between the bank and other institutions to compensate the bank when such losses occur. Risk transfer means that someone else is responsible for the loss and damages incurred from a particular loss.

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Managing Future Risks of Tornado

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