Each article summary must list the citation(APA format) for the article being summarized and provide 800-1000 words i which the student summarizes the main questions and conclusions of the paper and explains how the conclusions of the paper are useful to someone working in financial management of a corporation in the students current or proposed career path. The text of each summary must be 12-point Times New

Roman font, with one-inch top, bottom, left, and right margins, and each summary must begin on a new page.

ManagerialChallenges of the Contemporary Society, vol. 7 no. 1

119

THE IMPORTANCE OF RISK MANAGMENT FOR MANAGERS

H. LECK1
1 Babeş-Bolyai University, hod38@bezeqint.net

ABSTRACT
Accidents don’t happen by themselves, they are caused
accidentally, in contract to deliberate events. In most
organizations in the world the most valuable asset is the
human resource. The human workers are in charge of the
planning, manufacturing, building, packing, shipping and
selling of any kind of product. Workers who are injured
affectively hinder the organizations goals. The immediate
consequences are losses, immediate and long termed;
therefore any injured worker affects the organizations
resistance. Managers should investigate the causes of
these accidents and thereby prevent future accidents and
achieving goals they set for themselves regarding safety.
Managers at all levels should pin-point the hazards and
investigate the factors which could lead to accidents.
Early theories regarding safety (Heinrich, 1980) used
phrases as “unsafe behavior” and “unsafe condition”.
Nowadays, the most advanced theories are inclusive
theories which relate to factors such as immediate
execution factors, management efficiency, management
types regarding safety, risk management etc. This
approach was developed in the late 70’s during the
convention of atomic energy in the US (Johnson, 1980).
The theory maps out the hazard points which lead to the
accidents, concerning the management level and the
workers level. In fact the “root cause analysis” was adopted
in Israel in 2000. The main idea is that each manager will
be legally, lawfully, criminally and morally responsible to
manage the risks on his watch.

Keywords: Management, risk, accident, hazard, and injury.

JEL Classification: D81

1. Introduction

Immediate and critical factors in contrast to indirect,
systemic and deep-seated factors. When discussing the
causes of accidents one must distinguish between
immediate factors which cause the accident directly and
indirect factors which raise the probability for an accident,
though not causing it directly. For instance, a forklift driver
can miss and run over a stone on the road causing the
forklift to tip over. The direct cause of this accident is the
contact between the wheel and the stone and maybe also
the driver who was not paying enough attention. But this
accident may have, in addition, more profound causes such
as the driver being tired after a ten hour shift, poor
maintenance of the factory roads, lack of safety guidance
for the drivers etc. As demonstrated, there is a huge
difference between the immediate and indirect causes.

Therefore there are two main theories regarding accident
causes; theories which focus mainly on the critical event
that caused the accident (an event that can be referred to
as the malfunction mechanism), and theories that focus
mainly on the indirect and deep-seated causes. As can be
deduced, theories that focus on the critical event are much
simpler and don’t deal with complicated theoretical
considerations. Theories that focus on deep-seated causes
are often more complex, are multi-layered and use theories
from the fields of psychology and management. This paper
will discuss both types of theories.

2. Basic models of accidents

Basic models of accidents try to describe or explain how
the critical event that caused the accident happened
without trying to explain the indirect and environmental
factors that led to the accident. These models describe a
typical chain of events that end with an injury in order to
achieve a basic understanding of the malfunction
mechanisms involved in accidents. Most of the more
complex theories of accident causes are based on basic
models that relate to the critical event that caused the
injury. There are five major models that try to explain how
the critical event happens:

• The injury causation model- the “classic” safety
model which is based on the presence of a risk
factor that due to a “malfunction” or “error”
caused the injury or damage.

• Occupational hygiene model- this model explains
the injury in terms of exposure of the human to
the environment risk factor.

• The “energy” model- this model sees the accident
as a result of an uncontrolled energy passage
through a man or equipment.

• The “change” model- this model argues that at
the base of any accident is a change in one of the
regular stages of the work process.

• The ergonomic model- this model sees the
accident as a lack of compatibility between the
organizations needs and the humans’ actions.

Each one of these models is important in order to
understand the occurrence of accidents, as each one of
them focuses on the accident from a different point of view.

The injury causation model
This is the basic safety model which explains the
occurrence of an accident as a combination of two factors:

• A hazard with the potential of injury.

Managerial Challenges of the Contemporary Society, vol. 7 no. 1

120

• A “malfunction” or “error” which fulfilled the
hazard potential and made the injury or damage
possible.

Illustration number 1: The injury causation model
As described in illustration number 1, the presence of a risk
factor is not enough to cause an accident. The potential for
harm is fulfilled only if a malfunction or a deviation from
normal work occurs as well. Wigglesworth (Wigglesworth,
1972) described this model a little differently when
replacing the phrase “malfunction” with “error” (no wonder
he was a industrial psychologist, therefore preferring the
word “error”) (see illustration number 2). He distinguished
between an accident without injury that can be cause by an
error with no risk factors present and an accident with injury
that must involve the presence of a risk factor.

Illustration number 2: Wigglesworth’s model of injury

What we can derive from this model in order to reduce the
number of accidents is 1) to remove the risk factors (a
solution that is not practical many times) or 2) preventing
errors and malfunctions during the work process. This basic
model is included in the more complex models presented
next.

Occupational hygiene model
The occupational hygiene model uses the term of exposure
to environmental risk factors. The human is exposed to

harmful substances which are released to the air, and that
is how he is injured (see illustration number 3).

Illustration number 3: The occupational hygiene model

There are six components in the occupational hygiene
model:

• Source: the source has a potential to release
harmful substances into the environment. The
most efficient way to prevention an injury is to
replace the current source with a less dangerous

source, or changing the process in a way that the
source is less likely to release harmful
substances (for example, working with standard
pressure and temperature).

• Emission: a substance emitted from the source,
such as smoke, that has the potential to cause
harm. Preventing an injury in this stage includes
using means for preventing the harmful
substance from being released into the air by
using special devises for that purpose such as
fume hoods, suction devises etc.

• Transmission: the channel by which the harmful
substance reaches the receiver in the working
environment. Prevention in this stage can include
building physical barriers, increasing the distance
between the worker and the source and working
in a ventilated work place.

• Absorption: the entrance of the harmful
substance in the receivers’ body by means of
breathing, injection etc. Prevention in this stage
can include proper clothing and safety
equipment, but also by using substances that
cannot penetrate the human body (for example,
using a weak beta radiation that cannot penetrate
the clothes and skin).

• Receiver: usually the meaning is the human that
absorbs the substance. Prevention in this stage
could be minimizing the time of exposure to the
hazard: organizing the work in such a way that a
minimum of workers will be present when the
hazardous substance is released, changing
positions between workers etc.

• Result: controlling the possible outcome in two
aspects: early detection of symptoms indicating
an over-exposure (the worker should immediately
stop the exposure), and medical care and first aid
to decrease the effect of the exposure on the
workers health.

The “energy” model
This model, which underlies many other more complex
theories, defines the accident as an uncontrolled energy
passage through a man or equipment (see illustration
number 4).

Illustration number 4: Johnsons’ energy model

The energy model focuses on the energy source which
releases energy in the direction of the human. When there
are no barriers between the source and the human an
injury can occur. The energy could be one of many types
such as physical, chemical, biological, electrical, kinetic
energy etc. Barriers that can prevent the energy from
reaching the human being are a major part of this model
since they can prevent the injury. This model suggests four
ways to prevent an injury:

Accident

Risk factor

Malfunction

Event Ri

Injury Risk

Error

Energy
source

Human
→Energy passage

Managerial Challenges of the Contemporary Society, vol. 7 no. 1

121

• Removing the source of energy (removing the
risk factor).

• Blocking the energy source and by that
preventing the energy from spreading in the work
place (building barriers, fences etc).

• Separating the human from the energy source
(physical separation such as a barrier or time
based separation meaning preventing humans
from being in the energy path when it is released
from the energy source).

• Protecting the human workers by proper safety
equipment which prevents the hazard source
from penetrating.

The “change” model
Work accidents are often the result of changes in the work
method or in the working crew. A technique called change
analysis, which is an accepted technique in investigating
accidents in the chemistry and fuel industry, tries to pin-
point the changes that occurred in the working zone near
the time of the accident. This model assumes that any
accident is caused by a change in one of the working
processes or due to a new circumstance. Therefore, in
order to understand the causes of the accident one must
investigate and characterize those changes (see illustration
number 5).

Illustration number 5: The change model

Based on this model, the researchers Kepner and Tregoe
(Kepner and Tregoe, 1981) developed a six step technique
to investigate the causes of accidents. This technique is
particularly suitable for accidents where the causes for the
occurrence are unclear (as seen in illustration number 6).

Illustration number 6: Ferry’s’ change analysis technique

This technique can be used not only for understanding the
critical event but also in order to identify the indirect
causes. In fact, this model is used also to identify system
related causes and management causes but due to the

techniques simplicity and implications on other models, I
chose to present it in this section of basic models for
accidents.

Bird and Loftus domino theory
Bird and Loftus (Bird and Loftus, 1976) suggested an
improved domino theory which includes the responsibility of
the management in the event of an accident (see
illustration 7).

Illustration number 7: Bird and Loftus domino theory

The five “M” model
This Model discusses the interactions between the
following factors: Man, Machine, Media, Management, and
Mission (see illustration number 8). In this illustration it is
clear to see that man, machine and media overlap
significantly and are influenced by the standards and
procedures that management creates in order to
accomplish the mission. The system as a whole must be
analyzed in order to apply risk controls.

Illustration number 8: The five “M” model
While deriving from studies in the field, it is apparent that
“man” is the source of the greatest amount of risk, but
management is considered the controlling factor in mission
success or failure and is cited in 80 % of reported mishaps
by military safety centers and the National Safety Council.
This is why keeping supervisors involved is a concept of
high importance to the success of risk controlling.
Supervisors know the elaborate procedures of risk
management, and they usually have the power to effect
change when needed. They can assure that risk controls
are mission supportive because they usually have the
experience to see and reconcile risk costs and benefits. In

Managerial Challenges of the Contemporary Society, vol. 7 no. 1

122

emergency operations, they often have to manage risk
themselves.
An important comment regarding this point is to keep in
mind that the risk management must be mission-
supportive. There is no use in adding more bureaucracy
and wasting working hours if this does not reduce the
mishaps. Assuring that risk management always
validates the mission is a key concept. Target optimum
mission risk rather than minimum risk, because sometimes
not taking a risk is more harmful to the success of the
mission. You also need to involve operators while planning
risk controls to ensure that the controls are compatible
Six steps for operational risk management
This six step operational risk management plan is an
effective way to detect the risks and controls involved in the
procedure at hand. This method guarantees to take into
account the different aspects of risk factors which are
present in any procedure. In addition it helps prioritize the
issues at hand in order to organize the work.
It is essential to thoroughly investigate each step of the six
steps separately and then as a whole. In the case of
serious lack of time, all stages must still be addressed,
even if done briefly. This will prevent a situation where only
the most obvious risks are taken into account, while
neglecting other risk factors that are less obvious.

1. Identifying the hazards
In order to identify a hazard, you must first analyze the
mission for which you are performing the operational risk
management assessment, and then catalog the possible
hazards associated with each event of the mission, along
with their causes.
• Mission or task Analysis: The Hazards involved in the

mission events should be organized either
chronologically or in order of importance. This will
reduce the chances of forgetting any segment or
event of your mission.

• Identify Possible Hazards: The specific event under
analysis should be focused on and your list should be
focused to the “big picture” hazards rather than every
little difficulty that could occur.

• Identify Related Causes: Knowing the root cause
helps you devise controls that actually manage the
amount of risk associated with the hazard. Some
hazards may have multiple causes; you should use
the root cause. To determine the root cause, choose
the cause that is the first link in the chain of events
leading to mission degradation, personnel injury or
death, or property damage.

2. Assessing the risk
This risk assessing should be done for each hazard. Risks
are the probability of an event occurring, the severity of the
outcome, and the level of exposure of personnel or
resources to that event (see illustration number 9). Risk
assessment is a three-part process of evaluating the
amount of risk associated with each hazard or undesired
event.
First consider the level of exposure as the number of
personnel or resources affected by a given event, or, over
time, by repeated events.

• Estimate the level of severity of the hazard.
Hazard severity is ranked in qualitative terms and
can be assessed with the following standard
categories:
o Catastrophic (complete mission failure,

death, or loss of the system).
o Critical (major mission degradation, severe

injury, occupational illness or major system
damage).

o Moderate (minor mission degradation,
injury, minor occupational illness or minor
system damage).

o Negligible (less than minor mission
degradation, injury, occupational illness, or
minor system damage).

• Estimate the probability of the hazard. Express
the level of probability descriptively by using the
following levels:

o Frequent – occurs often.
o Likely – occurs regularly.
o Occasional – will occur.
o Seldom – may occur.
o Unlikely – rarely occurs.

• Express the risk level of a hazard. Use the risk
matrix shown below to determine the risk.

Illustration number 9: Assessing the risk- risk matrix

3. Analyzing risk control measures
Risk controls are designed to change risk by lowering the
probability of occurrence and/or decreasing the severity of
a risk. To analyze risk control measures, you must first
identify the control options available to you, then determine
their effects on the risk level, and finally prioritize the
control measures. You can use several resources
in helping you determine control measures: devise control
measures yourself. Using your experience and a little
imagination, you can create ideas for control measures. For
example, if the mission involves digging a trench in a
potentially high-traffic area, you could place barriers or
signs to re-route the traffic or do the work on weekends
when traffic would be minimal.
You can also select from a list of Macro Control Options
that help minimize risk directly. These macro control
options include: rejecting the risk entirely, avoiding a task,
delaying an event, transferring responsibility for an event,
spreading the work around, and compensation by
redundancy.
Further control measures can include engineer and design
to better suit your needs, guard, improve task design, limit

Managerial Challenges of the Contemporary Society, vol. 7 no. 1

123

exposure, selection of personnel, train and educate, warn
the humans around the work place, and motivate.
Once you have determined the effectiveness of your control
measures, rank them starting with the controls that have
the greatest effect on severity and probability. Even control
measures with only a small effect on risk level can be worth
implementing if the cost and resources imperative to do so
are low. Performing an opportunity assessment and a cost
versus benefit analysis will assist you in prioritizing control
measures. In some cases, computer modeling may also be
available.

4. Making risk control decisions

Before you start making risk control decisions, keep in mind
two important guidelines. First, make decisions at the right
time. It is important to review the mission and identify the
right time for risk decisions. Make decisions as late as
possible to allow more time for collecting and considering
hazards and associated risks. Don’t wait too long, though,
or decisions won’t be effectively integrated into the overall
mission. Second, make risk control decisions at the right
level. That level is the one that can best judge the full range
of issues involved. It is also relevant to keep the person
who would take the responsibility if the mission does not
succeed or even partly fail.
The first action in making control decisions is selecting
which risk controls to use. The key word here is frugality. If
you can control mission risk to an acceptable level by
implementing only one control measure rather than by
implementing several smaller measures, you would choose
the single measure. Although a single problem could have
multiple solutions which would give the desired effect, you
should strive to pick one since the addition of the others will
only cost more time and money. The goal is not the least
level of risk; it is the best level of risk for the total mission.
Once you have chosen the best mix of control measures it
is time for the big decision. Analyze the overall level of risk
for the mission with the selected controls in place. Decide if
the benefits of the mission outweigh the reduced level of
risk or if the risk level is still too high for the benefits that
would be gained from performing the mission. Be sure to
document the risk decision analysis for future reference.

5. Implementing risk controls

After you have decided what controls to implement, make
an implementation plan. For each control you must decide
and elaborate on a few matters. First, you must make the
implementation clear; all workers who have a part in it
should be fully aware of their parts. Second, you must
establish accountability; decide who is responsible for each
action, who has to report what and to whom etc. Third thing
you must see to is to provide support at all levels.
As you design the plan for risk control implementation,
keep two things in mind to assist in ensuring success. First,
stay in line with the organizational culture. For example, if
the unit normally uses a much decentralized approach,
don’t make a plan that requires strict centralized control of
every step. Personnel will resent it. Second, ensure a
positive reception by designing user ownership into the
plan. The best way to do this is to make sure that the users

themselves develop a significant percentage of the risk
controls.
The seven most common reasons why implementation
plans fail are elaborated below. The best way to avoid them
is to keep the personnel impinged by control in the loop.
Continuously assess your controls for these problems:

• Wrong control for the problem- you should always
check if this solution is really the best one.

• Too costly- the control can cost more than the
end profit or take a major part of it.

• Disliked by the operators- this situation can cause
interference with their work.

• Disliked by the leaders- this situation can cause a
bad atmosphere and affect the work.

• Misunderstood- the control can be poorly
operated.

• Overmatched by other priorities.
• Not measured until it’s too late- this way it is hard

to assess its effectiveness.

6. Supervising and reviewing

The sixth and final step of the operational risk management
process involves determining the actual effectiveness of
risk controls throughout the operation. This is the bottom
line in checking whether the measures taken are
worthwhile and are there any improvements that need to be
implemented.
There are three actions required for successful completion
of this step. The first step is to supervise the
implementation. The second is to review the cost vs.
benefit balance and the third is to ask for feedback on the
original plan. Supervision of risk control implementation
enables you to monitor the effectiveness of controls and
make adjustments as warranted. When operational risk
management is properly integrated, supervision of risk
controls is exactly the same as supervision of any
leadership action.
The inspection of risk controls focuses on costs in a couple
of ways. First, you are encouraged to analyze costs to see
if they are in line with expectations. There should be a
congruency between the original plan and the costs in
practice. If there is a large difference the plan should be
inspected and re-examined. Second, you are advised to
conduct a cost vs. benefit review to see if the benefits in
risk reduction are greater than the costs of the control
measure. If the change is nonexistent or just minor, then
the control is not effective and should be discontinued.
The feedback segment of the “Supervise and Review” step
has a threefold purpose.
• Informs all involved personnel about the progress of

the risk control implementation to retain co-
ownership.

• Compares the planned schedule of implementation to
the actual rate and make adjustments as necessary
to keep on track.

• Provides a means to directly measure the degree of
change in the physical condition or personnel
behavior in the organization.

Managerial Challenges of the Contemporary Society, vol. 7 no. 1

124

3. Conclusions

An accident in the workplace is a malfunction. It is a
malfunction in terms of the human behaviour, of the
technology, the work environment and in terms of the
management in charge. The malfunctions in term of the
management can refer to a lack of proper planning, lack of
safety guidance for the workers, lack of supervision, and
negligence in identifying hazards or finding proper solutions
for known hazards.
What is in common for all of these malfunctions is related to
the management style. The management’s main goal is to
organize and coordinate between the workers, the
environment, and the technology. That is why it is
imperative for a manager to understand and use risk
management in every step of the working process
regarding his workers. Questions he must ask himself are
is the worker qualified to undertake the task and does he
know what is expected of him? Are the machines intact? Is
the working environment safe and pleasant (for instance is
there enough light)? And who is supervising the worker?

References

[1] Bird, F.E, & Loftus, R.G. (1976). Loss control
management. Loganville, Georgia: Institute Press.
[2] “Committee Draft of ISO 31000 Risk management”
(2007). International Organization for Standardization.
[3] Heinrich, H. W. (1941). Industrial accident prevention
(2nd edition). New York: McGraw Hill.
[4] Heinrich, H. W., Petersen, D., & Roos, N. (1980).
Industrial accident prevention: A safety management
approach (5th edition). New York: McGraw Hill.
[5] Hubbard, Douglas (2009). The Failure of Risk
Management: Why It’s Broken and How to Fix It. John
Wiley & Sons. p. 46.
[6] ISO/DIS 31000 (2009). Risk management — Principles
and guidelines on implementation. International
Organization for Standardization.
[7] ISO/IEC Guide 73:2009 (2009). Risk management —
Vocabulary. International Organization for Standardization.
[8] Ferry, T. S. (1988). Modern accident investigation and
analysis (2nd ed.). New York: John Wiley and Sons.
[9] Flyvbjerg, B. & Budzier, A. (2011). Why Your IT Project
May Be Riskier Than You Think, Harvard Business Review,
vol. 89 (9), 601-603.
[10] Fraser, J., Simkins, B. J. & Del Bel Belluz, D. (2011).
Operational Risk Management in Enterprise Risk
Management: John Wiley & Sons inc.
[11] Johnson, W. G. (1980). MORT: Safety assurance
systems. New York: Marcel Dekker.
[12] Kepner, C. H., & Tregoc, B. B. (1981). The New
Rational Manager. New York: McGraw-Hill.
[13] Wigglesworth, E.C. (1972). A teaching model of injury
causation and a guide for selecting countermeasures.
Occupational Psychology, 46, 69-78.

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TEM Journal. Volume 9, Issue 4, Pages 1514‐1523, ISSN 2217‐8309, DOI: 10.18421/TEM94‐26, November 2020.

 

1514    TEM Journal – Volume 9 / Number 4 / 2020. 

Risk Management of Forming Enterprises

Integration Corporate Strategy

Oleksii Hutsaliuk 1, Viktor Koval 2, Oksana Tsimoshynska 3,
Mykola Koval 3, Hanna Skyba 3

1International European University, Avenue Akademika Glushkova 42V, Kiev, Ukraine
2 Odessa Institute of Trade and Economics of Kyiv National University of Trade and Economics,

Inglezi 6, Odesa, Ukraine
3Interregional Academy of Personnel Management, Frometivska St., 2. Kyiv, Ukraine

Abstract – The content and features of the
integration strategy in the system of strategic planning
of the joint stock company are determined. The
sequence of formation and implementation of the
integration strategy of the joint-stock company is
substantiated. Strategic alternatives for ensuring
sustainable development of the joint-stock company
are systematized. It is proposed to use the genetic
algorithm method to solve the problem of choosing
corporate integration association in order to optimize a
certain set of clear corporate integration association
parameters necessary for the implementation of an
effective integration process. The method for
calculating the synergistic effect is proposed, which is
advisable to use immediately after the integration and
the beginning of the operational activity of the
corporate integration association, since it can be
adjusted depending on the type of the corporate
integration association being formed and the motives
for its formation.

Keywords – integration, corporate

integration

association, joint-stock company, corporate culture,
strategy.

DOI: 10.18421/TEM94‐26 
https://doi.org/10.18421/TEM94-26 

Corresponding author: Viktor Koval, 
Odessa Institute of Trade and Economics of Kyiv National 
University  of  Trade  and  Economics,  Inglezi  6,  Odesa, 
Ukraine. 
Email: victor‐koval@ukr.net 

Received:   09 September 2020. 
Revised:     01 November 2020. 
Accepted:   06 November 2020. 
Published:  27 November 2020. 

©  2020  Viktor  Koval  et  al;  published  by 
UIKTEN.  This  work  is  licensed  under  the  Creative 
Commons  Attribution‐NonCommercial‐NoDerivs  4.0 
License.

The  article  is  published  with  Open  Access  at 
www.temjournal.com 

1. Introduction

Activation of integration processes is a
characteristic feature of the current stage in the world
of economic development [1]. The implementation of
these processes greatly affects the competitiveness of
enterprises and strengthens the position of the
integrated structure in the market, reduces
unproductive costs due to the effect of scale, access
to new markets, reducing risks during operations and
others.

The most common integration processes at this
time are in the implementation of mergers and
acquisitions of joint stock companies (JSC).
However, one of the most difficult issues in planning
JSC integration processes is determining the partner
for the formation of a corporate integration
association (CIO). This stage of planning integration
processes is relevant due to the fact that the process
of determining a partner is quite complex and
diverse, covers all areas of activity of all participants
in the integration process and requires a detailed
comprehensive approach to justify the choice of a
JSC to participate in CIO.

2. Materials and Methods

Methodological principles of planning integration
processes were considered in the works of [2], [3],
[4] and others. However, the issues of determining
the essence of the integration strategy of the JSC and
determining its place in the system of strategies of
the joint-stock company are not sufficiently studied.

The purpose of the study in the article is to
determine the essence of corporate integration
strategy, substantiate its place in the system of
strategies of the company, as well as to develop
approaches to the formation of corporate integration
strategy. To achieve this goal, the following research
methods were used in the work: monographic – to
study the theoretical foundations of the integration
processes of joint stock companies; system analysis –

https://doi.org/10.18421/TEM94-26

TEM Journal. Volume 9, Issue 4, Pages 1514‐1523, ISSN 2217‐8309, DOI: 10.18421/TEM94‐26, November 2020. 

TEM Journal – Volume 9 / Number 4 / 2020.                                                                                                               1515 

to justify the sequence of formation and
implementation of the integration strategy within the
company; analysis and synthesis – to generalize the
composition of factors that determine the choice of
strategic alternatives for the development of blood
pressure; graphic – for a visual representation and
schematic representation of theoretical and
methodological material.

Suggesting the use of the genetic algorithm
method, which allows to use objective and control
the degree of subjective factors and their influence on
the process of selecting potential participants in CIO,
provides much greater opportunities to solve the
problem of finding the optimal variant of CIO
formation.

Table 1. Genetic Algorithm Process

Stage Specification

1 Creation of the initial “population”

2
Determination of the most suitable
of JSCs “population”

3 Integration of JSC

5
Changing parameters (mutation) of
Integration

5
Attachment assessment of
integration association

Genetic algorithms (GAs) allow simulating some

of the integration processes of organizational
structures.

3. Results and Discussion

The integration of a joint-stock company is a

complex process, which includes organizational,
structural, functional and other changes that affect all
aspects of the activities of joint-stock companies that
form the CIO. The implementation of integration
processes is an important element of the overall
process of socio-economic development of the
company. From this point of view, the integration
strategy of the JSC should be considered as a set of
strategic decisions that determine the type and depth
of interaction of the JSC with other joint stock
companies or their associations.

The main provisions of the corporate integration
strategy should follow and be fully consistent with
other aspects of strategic planning within JSC
development. The lack of such coherence and the
lack of the necessary knowledge of JSC owners and
managers responsible for the implementation of
integration processes may lead to the use of a purely
extensive approach to the creation of CIO.

When implementing this approach, the corporate
strategy of the JSC (participants of the integration
process) and their organizational structure, which is

not fully suitable for this kind of expansion, remain
almost unchanged.

In this case, the creation is realized only by
increasing the number of workers and subordinate
structures. Also quite often the result of such a
process is the formation of CIO, the structure which
does not even meet the general requirements of
economic efficiency [5].

Thus, the formation of the integration strategy
within the JSC should be an integral part of the
management process aimed at reducing uncertainty
and risks in the implementation of the joint-stock
company integration processes. If the system of
strategies of a joint-stock company does not include
an integration strategy, the JSC often acts “ex post
facto”, is responds to changes in the environment
after they have been implemented.

In turn, the formulation and implementation of the
integration strategy allows the company to anticipate
a possible development option and make the
necessary correction of its behavior, i.e. significantly
limit the risks during integration. In addition,
insufficient coverage of all key aspects of the
implementation of the integration strategy can cause
the loss of key customers and employees, lead to
increased uncontrolled and unproductive costs, and
thus result in lower cost of JSC and hinder the
integration process as a whole. On the other hand, the
success of integration depends on how successful the
realization of the unique opportunities is, and that
arise as a result of the integration of economic and
social systems of different joint stock companies.

The formation of the JSC development program
should include a detailed consideration of all types of
development, from internal to the formation of
conglomerates and mergers and acquisitions. These
processes are interrelated and need to be coordinated.

Thus, even if a joint-stock company does not
implement an aggressive integration strategy, a
necessary condition for sustainable and predictable
development is the inclusion of integration
opportunities in the strategic plan. The process of
forming an integration strategy begins
simultaneously with the development of a corporate
strategy. According to the author, the sequence of
formation of the integration strategy of the joint-
stock company (Fig. 1) consists of six main stages:
formulation of the corporate strategy of the JSC, its
goals and objectives; analysis of the conditions of
JSC activity; determination of the variant of
development and type of CIO; determination of a
partner for the formation of CIO; planning of the
integration process and analysis of the general plan
of realization with regard to integration processes.

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Figure 1. The sequence of formation and implementation of the integration strategy of the company [11]

Formulation of the corporate strategy of the JSC, its goals and objectives

Determining the development option and type of CIO

Analysis of the conditions of JSC activity

Analysis of the external environment of blood Analysis of the internal environment of blood

Comparison of the results of the analysis of the external and internal environment of the JSC, the
formation of a matrix for determining strategic opportunities

Identifying ways to achieve the corporate goal and strategic goals of the JSC

Comparison of the results of the analysis of the conditions of JSC activity with the identified ways to

integration

Оriented blood
pressure

JSC, which is focused on
diversification

JSC, which is focused on
expanding markets for products

d i

Choosing the type of corporate integration association that will satisfy the chosen direction of

Defining a development option (integration or independent)

Determining the direction of further development of JSC

Analysis of the general plan of realization of integration processes

Integration process planning

integration possible

Development of a plan for the integration of JSC economic processes undergoing a merger-
i iti

Planning the organizational structure of CIO, which is formed during integration

Planning the integration of corporate cultures of JSC, overcoming resistance to change on the part of
t ff

Determining a partner for the formation of CIO

Determining the JSC that most fully meets the requirements of corporate and other strategies

Analysis of a promising integration process

Calculation of costs required to implement the integration strategy

in
te

g
ra

ti
on

i
s

no
t

p
o

ss
ib

le

Final selection of CIO participants, decision on the possibility of integration with this JSC
(CIO)

The integration process Evaluation of the integration effectiveness feedback

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Within the framework of the first stage the
formulation of the general corporate strategy of the
joint-stock company is carried out, the priorities of
activity are determined and the goals which it is
desirable to achieve are formed. A necessary
condition for this is an analysis of the conditions of
the company, which assesses the current state and
prospects of the internal environment (economic
potential) and the external environment of the JSC,
compares their characteristics and determines the
possible consequences of external factors on the
strategic position of the company. It should be noted
that the transformation of the external environment
can differ significantly in terms of direction,
intensity, predictability, time interval of influence,
etc. [6].

The internal environment of JSC is also
heterogeneous; its components are able to
demonstrate a very different response to changing
market conditions [7].

The main criterion for differentiating the internal
environment from this point of view is stability, and
the ability of the elements of the internal
environment and the relationships between them to
maintain a certain level of stability (invariance of
composition and structure) under the influence of
environmental transformations. The degree of
stability is associated with the degree of intensity,
nature and direction of external influences, which
does not require internal changes and maintains a
certain level of internal efficiency (to maintain and
develop adaptive properties) [8], [9].

The result of comparing the properties of the
internal and external environment of the enterprise is
to determine the specification of the corporate
strategy of JSC, i.e. a set of the most common goals
and cultural and ideological guidelines that
characterize the purpose (existence) and principles of
the enterprise. Such an analysis is necessary to
determine the further direction of development and
(in the case of choosing an integration alternative) –
to form an integration strategy of the JSC. Such an
analysis clarifies the prerequisites that determine the
attractiveness of the choice including ways of
integration, identifies the reasons why the JSC should
abandon further independent development in favor of
participation in the CIO. The content of the
integration strategy, the tools of its implementation,
as well as the organizational and legal form of the
future corporate integration association, the type and
degree of synergy that has to be formed to achieve
the goals defined in the corporate strategy of the JSC
depend on the prerequisites.

An important component of analytical research
during this stage is also the analysis of the industry in
which the company operates; its market position,
technology, products, resources, its structure and

growth dynamics, definition and forecast of forces,
the impact of macroeconomic factors, legislative and
competitive changes, and fluctuations in demand. It
is necessary to assess the driving forces and identify
key success factors in this area, to assess its
competitiveness and viability. Also, it is necessary to
analyze the prospects of JSC for further development
in the selected industry and analysis of industries in
which the possible exit of this JSC through the
formation of CIO.

Based on the results of the analysis of a wide range
of factors that determine the choice of strategic
alternatives for JSC development, recommendations
on further development options (independent or
integration) are summarized, as well as substantiation
of strategic decisions to ensure further sustainable
development of JSC, which include the following:
new markets; achieving monopoly positions in the
market; obtaining savings due to the effect of scale;
the need to supplement or improve existing
technologies; obtaining savings on expensive work
on the development and creation of new products;
cost reduction by expanding the network of suppliers
or sales; the need to reduce risks, etc. Each of the
strategic decisions of this direction determines the
future orientation of the JSC, which will be able to
meet the achievement of the required strategic
results, namely: JSC, which is focused on the
diversification of activities; JSC, which is focused on
expanding markets for products and services;
vertically oriented blood pressure [10].

The results of the analysis of the conditions of JSC
activity, the establishment of a corporate strategy and
the definition of the option of further development
are a prerequisite for the formation of a set of
strategies, which include integration. Based on the
analysis of business conditions and comparison of its
results with the corporate strategy, the growth
strategy of this JSC is determined: strengthening the
market position; market development; product
development; reverse vertical integration; direct
vertical integration; centered diversification;
horizontal diversification; conglomerate
diversification; harvesting; cost reduction; liquidation
[11]. For the chosen strategy the main factors of
ensuring competitiveness are determined.
Determining the further variant of JSC development
(integration or independent) is carried out in the
following stages:

1. Assessment of internal factors shaping the
competitiveness of JSC.

2. Assessment of external factors shaping the
competitiveness of JSC.

3. Determining the amount of strategic resources
required to ensure the required level of
competitiveness of the JSC.

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4. Determining the needs of the JSC in attracting
strategic resources (determining the gap).

5. Identifying opportunities to attract strategic
resources from external sources.

6. Determining the composition of sources of
relevant resources.

7. Defining additional conditions and restrictions on
the use of resources and ensuring the
competitiveness of the JSC.

8. The choice of option for the development of a
joint stock company.

Given the impossibility of increasing the absolute
amount of available JSC strategic resources, any
change in the consumption of these resources will be
possible only through a change in the ratio of the use
of interchangeable resources or their involvement
from the outside. Thus, if the effective use of
available strategic resources is not sufficient to
achieve the corporate strategy of the JSC, it is
necessary to acquire them or combine them with
another JSC – the owner of the necessary resources.

For each JSC development strategy, the factors
that determine the competitiveness of JSC will be
different and different factors will determine the
feasibility of choosing an integrated or independent
path of development. Some of the above strategies do
not provide the implementation of the integration
development of JSC, these are strategies of reduction
(harvesting, cost reduction, liquidation). For other
strategies, there are certain factors and strategic
resources that determine the effective
implementation of activities, support competitiveness
and determine the ways of further development
(Table 2). After identifying the key factors that
determine the choice of a particular path of
development of JSC, and their importance, they are
compared by experts and determine the general
recommendations for choosing a particular path.

The results of the analysis of the conditions with
regard to the joint-stock company and the definition
of the main key factors in the implementation of a
particular strategy allows the formation of specific
strategic plans for the implementation of integration
processes, which include the following elements:

1) a set of desired qualitative and quantitative
parameters of the joint-stock company, the
achievement of which is the goal of the corporate
strategy of the JSC;

2) principles, rules and norms of coordination of
interests of participants of integration processes;

3) methods and forms of regulating the
implementation of integration processes, which
should be mainly used in the implementation of
the integration strategy;

4) principles, rules and norms of choice of sources
of financing of integration development;

5) principles, rules and norms for determining
partners for the formation of a corporate
integration association.

Thus, the result of this stage is to determine the
option of further development of the company and, in
the case of the choice of integration development –
the formation of a set of strategic recommendations
on the principles, rules and sequence of development
through integration processes.

Comparison of the corporate strategy and analysis
of the external and internal environment allows to
identify specific sources of synergy effects necessary
for the development of JSC and to establish the
probability of their achievement. Ensuring the
formation of all possible desired synergy effects and
obtaining CIO with ideal indicators is often
impossible. This is due to the principle of optimality
of Pareto. The principle of efficiency of functioning
of any economic system according to Pareto, states
that in effective economic system it is impossible to
make any improvement without corresponding
deterioration of other parameters of this system [12].
Thus, achieving all the synergistic effects that are
desirable in accordance with the corporate strategy is
impossible. This is due to different directions of their
possible receipt, contradictions between them, lack of
resources for the simultaneous implementation of all
desired effects, and the mismatch of some of the
synergies to the chosen overall corporate strategy and
identified development priorities. Therefore, the
overall synergistic effect will not simply be the result
of all the desired effects. The relationship between
these effects is determined by the function, the value
of which will change as its components change.

However, this effect is the most predictable that
can be obtained during the implementation of all
measures provided for in the integration strategy of
the company. That is, this is the effect that will be
obtained as a result of the most effective
implementation of the integration strategy of the
company, which is formed on the basis of the
prerequisites that were identified during the analysis
of the JSC. In the case where the integration with the
joint-stock company is carried out for its further sale,
the level of overall synergy will not have a
significant impact. This is due to the goals of such
integration and the ephemerality of the integration
process [13], [14].

All of the above applies to individual business
strategies of a joint stock company or a corporate
integration association as a whole. It should be noted
that during the activity, the JSC or CIO may have
several different business strategies that may
interfere with each other.

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Table 2. Factors determining the choice of strategic alternatives for the development of JSC

Orientation Factors

Characteristics of the influence of
the factors on the choice of

alternatives
Independent Integration

Strengthening
market
position

Availability of strategic resources to strengthen the position

There are They do not exist

The cost of expanding the network or building a new one

Low High

The cost of integration

High Low

Availability of unused reserves to expand the sales network

Exist Does not exist

The estimated cost of merging with the owner of such a network High Low
Risks of self-development Low High

Market
development

Availability of unused reserves of the sales network of this product
in other markets

Exist Does not exist

The cost of building a new sales network in a new market Low High
The estimated cost of merging with the owner of such a network to
enter new markets

High Low

Product
development

Availability of untapped opportunities for the production of a new
type of product

There are They do not exist

The cost of introducing production facilities for the production of a
new type of goods

Low High

The estimated cost of combining with the owner of such facilities High Low

Reverse
vertical

integration

Possibility and cost of acquiring existing capacities to implement the
strategy of reverse vertical integration

There is / low

Does not exist /

high
The cost of construction of such facilities Low High
The cost of combining with own suppliers or their competitors High Low
Terms of implementation of such independent construction Short Long
Possible risks of the integration process There are / high None / low

Direct vertical
integration

Opportunity and cost of purchasing existing capacity from
consumers

There is / low
Does not exist /

high
The cost of self-development of consumer infrastructure Low High

Cost and possibility of association with consumers

Low / exists
High / does not

exist
Terms of such development and integration Short Long
Possible risks of the integration process None / low There are / high

Centered
diversification

This strategy involves the use of existing opportunities of JSC and the development of new products based
on them. During the implementation of this development strategy, the integration path is not promising.
This is due to the specifics of this strategy.

Horizontal
diversification

Possibility and cost of introducing new production facilities or
technologies that are necessary for further diversification

There is / low
Does not exist /

high
Existing experience with these technologies Exist Does not exist

Possibility and cost of association with their owner
Does not exist /

high
There is / low

Probable risks of independent introduction of new technologies None / low There are / high

Conglomerate
diversification

Cost and general possibility of introduction of new production and
its development by own forces

Low / exists
High / does not

exist
Possibility and cost of association with the owner of production
facilities, which is necessary

Does not exist /
high

There is / low

Probable risks of realization of an integration way of development High Low
Harvesting

Due to the specifics do not provide an integration path of development Cost reduction
Elimination

Therefore, it is important to optimize the business
portfolio of the corporate integration association that
is being formed [15]. At this stage, it is necessary to
form a certain register of synergies that are needed to
achieve previously formulated strategic results. It
should include all synergy effects, the receipt of
which is necessary for the further development of
JSC and are consistent with the corporate strategy.

When selecting such possible synergies, it is
necessary to take into account the results of the
analysis of the external and internal environment of
the blood pressure. This is necessary in order to
eliminate synergies that cannot be achieved by the
company due to certain features of the JSC or its
environment.

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For each required strategic result, conclusions are
formed on the overall possibility of achieving it using
the above synergies and certain difficulties that may
be encountered by the company. For each strategic
effect, conclusions are also formed on the possibility
of its implementation with notes on the general
features of such an effect [16].

At the next stage (selection of potential
participants in the integration process) the
possibilities of integration of JSC with other business
entities or with certain corporate integration
associations are determined on the issue of obtaining
certain synergies, the selection that best meets the
requirements of such synergies. The generalization of
the prospects of integration involves a
comprehensive analysis, which consists of analysis,
in fact, the process of formation of the association;
the expected results of the formation of CIO and the
risks of integration processes. At this stage, the
calculation of possible costs for the implementation
of the integration strategy is also carried out, after
which the final verification of the selected candidate
is carried out according to the following parameters.

1. Development strategy. It is necessary to find out
what development strategy the candidate has; in
which area it is planned to work in the strategic
perspective; due to which resources it is planned to
achieve strategic goals. After that, the results
obtained have to be compared with the strategic plans
of the joint-stock company – the initiator of the
formation of CIO.

2. The scale of operations and business turnover. It
is necessary to determine how the blood pressure
differs from each other in terms of overall
performance. This is due to the fact that a large gap
in the size or performance indicators will
significantly affect the position of future participants
in the negotiations and the dynamics of relations
between them in the implementation of the
agreement.

3. Current customers. It is necessary to find out
how the clients of joint-stock companies differ in
their characteristics; whether the methods of
promotion and servicing of current clients of future
participants of CIO contradict; how an association
can affect customer loyalty.

4. Potential customers. At this stage, it is clarified
who is a potential client of the joint-stock company,
whether it is contrary to the strategic goals of the
joint-stock company to enter this market and to what
extent it is consistent with the investment strategy of
the JSC.

5. Organizational structure. It is necessary to
determine the principle of organized work of
potential partners – functional, divisional or matrix;
how many positions are duplicated with those of the
initiating joint-stock company and who holds them;

6. Control systems. It is also important to
determine the accepted procedures and standards
used by future participants of the CIO and how
formalized the information flows in the middle.

7. Personnel policy. At this stage, it is necessary to
determine how potential participants in the CIO
position themselves in the labor market, what is the
system of personnel selection, training, development,
motivation and rewards, as well as who makes key
decisions on issues related to staff.

8. Corporate culture. Combined JSCs always have
some differences in corporate governance systems.
Such differences can lead to conflicts and failures in
the integration process. Therefore, it is especially
important to agree on how the CIO management will
be organized during the integration period, what
corporate governance system will be formed as a
result of the CIO integration, personal distribution of
positions and functional duties and responsibilities,
etc. In addition, the management of the JSC that
manages the CIO, usually has its own vision of the
desired corporate culture in the subordinate JSCs or
divisions, which should link all the companies in the
group.

Assessment of the state of corporate culture should
be carried out in three main areas: qualitative
characteristics of corporate culture; the power of
corporate culture; management’s attitude to corporate
culture. Each of the main areas of analysis of
corporate culture involves certain stages. During the
study of the qualitative characteristics of corporate
culture it is necessary to assess the following issues:
material business environment, JSC symbols
(appearance of employees, design of office space,
working conditions, use of corporate symbols,
language, history); employee behavior (models of
work performance, interaction with clients,
interaction between managers and subordinates,
formal and informal interaction between employees,
traditions); declared values, norms and rules,
regulations (mission and goals of the JSC, principles
of conduct and corporate values, internal regulations
of the joint-stock company) [17].

During the analysis of the strength of corporate
culture it is necessary to determine the presence of a
dominant culture and the presence of subcultures,
their number and relationship, the presence of
contradictions [16], [18]. In turn, the analysis of the
attitude of management to corporate culture involves
determining the position of JSC management in
relation to corporate culture, the impact of
management on culture and tools for such influence.

It is equally important to pay attention to the
cultural differences of the merging joint stock
companies. At the moment, domestic companies are
at very different stages of development, using
different styles and cultures of management. The

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problem of cultural mismatch between future
members of the CIO is often one of the reasons for
the loss of specialists of joint stock companies, which
cannot only stop the integration process, but also lead
to difficulties in the further functioning of individual
JSCs. All this necessitates the formulation of the
image of CIO and inform all employees.

9. Ownership structure. It is necessary to find out
who owns the shares, what are the intentions of other
shareholders. It is also important to clarify the
relationship between minority shareholders. When
formulating an integration strategy, it should be
borne in mind that shareholders who have small
stakes may unite to counter an undesirable merger.

10. Checking the legitimacy of privatization.
During the integration of domestic joint-stock
companies formed in Soviet times, there is a test of
the legitimacy of privatization. Part of the shares may
not be registered, and the register, contrary to the
law, may not be with an independent registrar, but at
the enterprise itself. Sometimes some provisions of
the statute contradict the law and, as a result, are
invalid.

11. Preferences. One should also find out if any
local authorities have any preferences from
competitors. In this case, integration may not be
beneficial.

12. Financial evaluation of the candidate. At this
stage, the cost of the JSC, with which it is planned to
integrate, is assessed, using indicators that
characterize both the internal and external
components of the conditions of the JSC. It should
also be borne in mind that a joint stock company may
have serious debts that actually depreciate the
benefits of integration with it. There may also be
obligations that interfere with the business (an
exclusive agreement with a distributor under which
the company is obliged to supply most of the
products at a reduced price). It is just as important to
study the debts, fines, penalties, penalties that a JSC
has. Thus, it is important to determine the dynamics
of such indicators as: margin, balance sheet and net
profit of JSC; product cost structure; accounts
payable, including principal debts and penalties to
budgets of all levels and extra-budgetary funds;
receivables; excess stocks; indicators that
characterize the turnover of money; delay in payment
of wages; product structure.

Conclusions on all stages of this analysis are
considered together. After that, a decision is made on
the attractiveness or unattractiveness of the joint-
stock company as a participant in the integration
relationship, on the continuation of work with this
JSC opportunity or the need for more in-depth
analysis.

Thus, the definition of a partner for the formation
of CIO is the selection of certain JSCs with clear
optimal characteristics that should contribute to the
achievement of the strategic goals of the initiator of
the integration process – in the case of merging these
joint stock companies [11]. The existence of a JSC,
the characteristics of which would fully satisfy the
system of JSC strategies for the formation of CIO is
almost impossible: the achievement of optimal values
of certain characteristics of JSC may make it
impossible to achieve the optimum of another. Thus,
the task of JSC selection is to optimize a certain set
of clear JSC parameters that are necessary for the
implementation of an effective integration process.
Uncertainty and vagueness of these parameters
necessitates the assignment of this problem to the
class of optimization problems, the solution of which
can be carried out on the basis of full search
methods, analytical optimization, Neld-Mead method
and others. However, the possibilities of using these
methods in substantiating integration processes are
quite limited. This is due to the peculiarities of these
methods, which require significant time to
implement, a large number of expert estimates of the
objective function in order to find the optimum, a
large number of mathematical calculations and
unable to find the global maximum or minimum of
the objective function. Optimal choice of blood
pressure is based on objective indicators. From the
author’s point of view, the use of the method of
genetic algorithm, which allows to use objective and
control the degree of subjective factors and their
influence on the process of selecting potential
participants in CIO, provides much greater
opportunities to solve the problem of finding the
optimal variant of CIO formation [18]. The great
potential of using the method of genetic algorithm for
such problems is due to its main features: it is
optimized by continuous parameters; does not require
derived information; does not require the calculation
of the derivative of the objective function;
simultaneously searches among a wide area of the
target plane; has the ability to work with a large
number of parameters; used for parallel components;
optimizes the parameters of a complex target plane;
parameters can appear from local optimization; finds
the only optimal solution; has the ability to encode
parameters to perform calculations of encoded
parameters; has the ability to work with a large
amount of generated, experimental data and
analytical functions.

Thus, the result of this stage of the sequence of
formation within the integration strategy of the joint-
stock company is to determine a specific candidate
for the formation of CIO, integration with which is
consistent with the corporate strategy of the company
and synergy from the merger with which will be

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maximum [19], [20]. After that, an initial agreement
is reached on the value of the agreement, its structure
and the integration process is initiated, including
negotiations with antitrust authorities, internal
preparations for the integration process, assessment
of the size and sources of synergies.

The synergy effect increases revenue and increases
the cash flow of the corporate integration association.
In general, the magnitude of the synergistic effect
formed within the CIO will be determined as follows
[21]:

En = ((IA)n+(ID)n +(EC) n) – ( I n +P n + I0) (1)

where n – settlement period; Cn – overall
synergistic effect; (IA)n – estimated additional
income from the expansion of activities; (ID)n –
estimated additional profit from risk reduction due to
diversification of CIO activities; (EC)n – saving
current production costs; In – additional investments
in reconstruction and expansion; Pn – increase
(savings) of tax payments; I0 – investment at the time
of acquisition.

The method of calculating the synergistic effect
can be adjusted depending on the type of CIO formed
and the motives for its formation. However, this
method has a significant disadvantage, which in
some cases may prevent its use or even lead to
distortion of the evaluation results – it is not taking
into account changes in the value of money over time
[22]. This method of calculating the synergy effect
can be used immediately after the integration and the
beginning of the operational activities of the CIO. If
it is necessary to analyze the synergy effect after a
certain period of time, it is necessary to calculate the
discount rate. In this case, the overall synergistic
effect will be calculated as follows [21]:

? = ∑ ∆CFt
(1+r)

t
T
t=1 (2)

 

where ∆CFt – the difference to time t between the
cash flows of the consolidated firm and the amount
of cash flows of each company separately; r –
mathematical expectation of the discount rate,
calculated taking into account the planned rate of
return on equity of the company that was not the
initiator of the integration process.

The increase in cash flows should be defined as
follows [21]:

∆CFt = ∆Rt – ∆Ct – ∆Tt – ∆It (3)

where ∆Rt – increase integration income; ∆Ct –
increase costs; ∆Tt – increase in tax deductions; ∆It –
increase additional investments in working capital
and fixed assets.

Based on this formula, it is possible to divide the
sources of synergy into four main categories:
increase revenue, reduce costs, reduce tax deductions
and reduce additional investment, and on the basis of
which, if necessary, conduct a factor analysis to
determine the degree of achievement of strategy,
integration goals and, if possible, identify reserves to
increase the synergistic effect.

4. Conclusions

The implementation of integration processes is an

important element of the overall process of socio-
economic development of the company. The main
provisions of the integration strategy of the joint-
stock company should follow and be fully consistent
with other aspects of strategic planning of JSC
development. The formation of the integration
strategy of the JSC is an integral part of reducing
uncertainty and risks in the implementation of the
joint-stock company integration-type processes. The
sequence of formation of the integration strategy of
the JSC consists of six main stages: formulation of
the general corporate strategy of the JSC, its goals
and objectives; analysis of the conditions of JSC
activity; determination of the variant of development
and type of CIO; determination of a partner for the
formation of CIO; planning of the integration process
and analysis of the general plan of realization of
integration processes. Defining a partner for the
formation of CIO is the selection of certain JSCs
with clear optimal characteristics that should
contribute to the achievement of the strategic goals of
the initiator of the integration process – in the case of
combining JSC data. Thus, the task of JSC selection
is to optimize some set of clear JSC parameters that
are necessary for the implementation of an effective
integration process. To solve this problem, it is
proposed to use the method of genetic algorithm.

Areas of further research in this area should be
considered the justification of methodological
approaches to justify the choice of partners for the
formation of CIO using the method of genetic
algorithm.

TEM Journal. Volume 9, Issue 4, Pages 1514‐1523, ISSN 2217‐8309, DOI: 10.18421/TEM94‐26, November 2020. 

TEM Journal – Volume 9 / Number 4 / 2020.                                                                                                               1523 

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Copyright of TEM Journal is the property of UIKTEN-Association for Information
Communication Technology Education & Science and its content may not be copied or
emailed to multiple sites or posted to a listserv without the copyright holder’s express written
permission. However, users may print, download, or email articles for individual use.

133METALURGIJA 60 (2021) 1-2, 133-

136

T. KARKOSZKA

RISK MANAGEMENT SYSTEM IN
METALLURGICAL PRODUC TION

Received – Primljeno: 2020-07-15
Accepted – Prihvaćeno: 2020-10-20

Preliminary Note – Prethodno priopćenje

T. Karkoszka, e-mail: tatiana.karkoszka@polsl.pl, Silesian University
of Technology, Gliwice, Poland

The main aim of the paper is to characterize the proposed model of risk management system. Threats identification
and risk assessment of the systemic character result in taking action directed on risk elimination, minimization or
financing. Concept of the risk management system includes the following anti-risk activities concerning: knowl-
edge, operating, experience and improvement. Those risk actions guarantee effective manner of risk management,
which is of particular meaning due to the difficult situation of the European Union’s steel industry facing geopoliti-
cal, economic and environmental challenges. The model in question can be treated as a guidelines for proceeding
in case of prevention and response to the potential, both strategic and operational, metallurgical risk.

Keywords: metallurgy, production, management system, risk management

INTRODUCTION

Based on the reports concerning the risk ranking, it
can be said that the companies with metallurgical pro-
duction and especially steel mills, takes one of the top
positions.

Therefore, it is of high importance to implement the
solutions aiming at taking risk, however, these solutions
are just one of the risk management’s links. Taking up
the decision on the way of risk management is not an
easy task. The risk at the steel mill is of the interdiscipli-
nary character and the activities connected with the risk
are usually realized in a various way as well as by vari-
ous organizational units – depending on the category
and the scope of the risk [1,2].

Meanwhile, the effective risk management should
be complex one and treated as the “systemic, statisti-
cally based, and holistic process that builds on formal
risk assessment and management [3]”.

The EU steel manufacturers are confronted with the
risk of losing control and global market share, even for
quality products. The lack of balance within the raw
material supply strongly affects the EU industry being
highly dependent on raw material imports. As a result of
rising prices of energy and CO2 emission permissions,
the steel industry faces a rising production costs and a
loss of competitiveness [4].

The steel products have a key meaning for
the functioning and development of each society, there-
fore, it is indispensable to implement such solutions,
which just at a minimal level could limit the risk in-
volved in the metallurgical production.

ISSN 0543-5846
METABK 60(1-2) 133-136 (2021)

UDC – UDK 669.011:338.455:06.04-168.4:06.04-368.025.6=111

METHODOLOGY

Basic aim of the carried out research was to identify
the risk at the steel plant as well as to develop the algo-
rithm of managing the risk mentioned together with tak-
ing into consideration the possibility of systemic solu-
tions implementation.

The undertaken actions were directed at risk catego-
rization, defining its sources and answering the ques-

Figure 1 Scheme of dependences between risk management
in different normalized and informal management
systems; developed on the basis of [5-13].

134

T. KARKOSZKA: RISK MANAGEMENT SYSTEM IN METALLURGICAL PRODUCTION

METALURGIJA 60 (2021) 1-2, 133-136

tion if it is possible to apply one algorithm for risk man-
agement regardless of its category and scope.

The foundation of the research was analysis of (see
Figure 1) [5-13]:

• requirements of normalized management systems
timing at ensuring the following targets: quality
– ISO 9001, environmental – ISO 14001, infor-
mation safety – ISO 27001, workplace safety –
ISO 45001, continuity of activity of the business
processes – ISO 22301,

• guidelines of informal management manners of
corporation risk of strategic, financial and opera-
tional character – COSO, CAS, FERMA.

One has taken the trial of verification if the stand-
ards regulating in a systemic way the organisation’s
management – in various scope – still remain effective
in the context of the standardized requirements of risk
management, which could be a kind of replacement.

The algorithm is dedicated to those organizations
which want to unify the manner of risk management
independently of its character, also to the metallurgical
plants.

RESULTS IN METALLURGICAL PRODUCTION

The base for the complex risk management idea is
the assumption that the risk can be managed regardless
of its character and in the standardized systemic way
(see: Figure 2).

Figure 2 Scheme of risk management for strategic,
operational and system-wide processes.

Figure 3 Concept of the risk management system.

135METALURGIJA 60 (2021) 1-2, 133-136

T. KARKOSZKA: RISK MANAGEMENT SYSTEM IN METALLURGICAL PRODUCTION

Considering such a assumption, within the cycle of
the risk management (knowledge – operating – experi-
ence – improvement) are written in not only the pro-
cesses aiming at the realization of the particular strate-
gic and operational goals established by the enterprise
but also the processes covering the risk management
system of the mentioned organization. Therefore, it in-
volves the processes aiming at both: stability of the cur-
rent activity of the organization as well as these ones
concerning the long-term development. It refers to these
processes which threats are of various kinds as well as
the ones which assessment should be realized in a stand-
ardized systemic way (see: Figure 3).

Risk knowledge covers the identification of the
threats and the assessment of the planned processes
risk. One should bear in mind that both: threats identifi-
cation as well as the risk assessment should take into
consideration regular conditions of the processes reali-
zation as well as the exceptional conditions, in which a
sudden occurrence may lead to the disruption of the
process continuity. Based on the risk knowledge the

ways of risk operating are defined and next the choice
of the most effective risk undertaking method is done.

Exemplary threats and their outcomes together with
the ways of risk taking for the processes realized on
various organizational levels in the steel mill have been
presented in Table 1.

Risk operating can be of active or passive character.
The actions of active form covers the following:

• risk avoidance, focusing on its elimination, mini-
mization or redistribution,

• risk transfer enabling risk redistribution – partial-
ly or fully – on other entity,

• risk financing, which doesn’t undergo elimina-
tion, minimization or redistribution.

The remaining risk, which hasn’t been eliminated
within the range of active approach undergoes control
in the regular conditions as well as while the incident
occurs. It is monitored due to ensuring the constant lev-
el. Moreover, the organisation undertakes the preven-
tive actions avoiding the incidents and minimising the
probability of their occurrence and in the situation of

Table 1 Summary of the exemplary threats and risk operating manners in different processes in the steel plant.

Kind of risk Exemplary threats Exemplary threats’ eff ects Exemplary risk operating manner

Strategic level

Competition

risk

High competition on the steel market,
especially with the cheap products

manufactured out of European Union.

Limitation of production,
production focused exclusively on the

products which sales is economic

Passive/Incident prevention: strategy of
building clients’ capital based on using

the competition tools

Environmental
risk

Higher prices for the CO
2
emission

permission and price increase of electric
energy refraining from also growing

emission costs

Limitation of production

Active/Risk avoidance:
modernization focused on diminishing

the production energy consumption
and CO

2
emission

Operational level

Occupational
safety risk

Contact with: movable, immobile and
sharp material factors

Injuries resulting from accidents at work
(including the mortal ones)

Passive/Incident response: fi rst medical
treatment, call of emergency services,
with cooperation with designed pro-

cedures

Environmental
risk

Emission of: the particulate matter, the
sulphur dioxide, the nitrogen diox-

ide, the carbon monoxide, the carbon
dioxides

Pollution of the air with the nitrogen
dioxide, acid rains and soil acidifi cation

Passive/Risk monitoring: operational
control of particulate matters and diox-

ides emissions

Technical and
technological

risk

Obsolescence and corrosion of installa-
tions, lack of monitoring the machines
and installations, lack of technological

instruction of using the installation in the
normal operation

Machines and devices failures which
can cause: their stoppage and material

loss, fault of material, uncontrollable
environment’s pollution and accidents

at work

Passive/Incident prevention: monitoring
the machines and installations

Personal
risk

Rising skills and knowledge require-
ments, high average age in the sector

Decreasing labour force, both in the
scope of number, skills and knowledge

Passive/Incident prevention:
actions covering: choice of the workers,

their motivation and development –
aimed at

attracting and maintaining highly
skilled labour

IT, safety,
data protec-

tion
risk

Cyber crime, malpractice from the side of
dishonest, servers, computers and links’

failures

Loss of access, confi dentiality or integ-
rity of the stored information

Active/Risk transfer: insurance covering
the costs of claims and damage repairs
and the reimbursement of lost profi ts

System level

Management
system

risk

Lack of systemic risk management – lack
of the following: organizational struc-
ture, planning, repeatability, improve-
ment, documentation, communication

and assessment

Ineffi ciency in risk management, and
as a result – actions connected with its

undertaking

Passive/Risk monitoring: risk manage-
ment system audits

136
T. KARKOSZKA: RISK MANAGEMENT SYSTEM IN METALLURGICAL PRODUCTION
METALURGIJA 60 (2021) 1-2, 133-136

their fruition – the organisation is prepared for eliminat-
ing the risk’s outcomes and diminishing their meaning.

Risk experience is based on the analysis of the con-
trol effects and allows for developing possibilities of
improving processes, which while being estimated by
the risk assessment and accomplished by the outcomes
confirming its effectiveness – can be used as the ele-
ments of improvement. It is reflection of the reactive
monitoring.

Risk improvement concerns the following physical
actions of technical, technological, and organizational
character aiming at minimizing the risk or its elimina-
tion and the financial actions both: on the strategic and
operational lever, including the range of risk manage-
ment system itself. On the risk improvement level tak-
ing up risk can be of different character than in the
scope of risk operating.

CONCLUSIONS

The European metallurgical industry is facing multi-
ple challenges, refraining both: from the external and
the internal conditions. Drop in the steel demand, im-
balances in the supply and demand for iron ore, costs
increase of the CO2 emission permissions and high
competitiveness on the market – on one hand, as well as
the necessity of fulfilling requirements stated by vari-
ous stakeholders – on the other hand, all cause that the
metallurgical industry enterprises must apply the solu-
tions allowing for the realization of the planned goals in
a more effective way.

Such a panacea can be the proposed concept of or-
ganization’s risk management, which requires from the
enterprise implementation of the risk management sys-
tem together with the proper for it organizational struc-
ture. The base of the system functioning is the assump-
tion that the risk connected with various processes must
be managed in a standardized way. At the same time,
planning the strategic as well as the operational goals
should be accompanied by the risk assessment, and based
on its results, the ways of the risk undertaking should
vary and be adjusted to the particular kind of risk.

The described risk management, covering: risk
knowledge, risk operating, risk experience and risk im-
provement, enters into the informal risk management,
and – being consistent with the guidance within the
scope of planning, operation, evaluation and improve-

ment – it fulfills the requirements of the normalized
management systems.

The concept of systemic risk management is dedicat-
ed to the metallurgical industry enterprises, which want
to take up risk – especially by preventing the occurrence
of threats’ outcomes and generating the costs connected
with them. The concept in question may find the applica-
tion in both: regular realization of the processes as well as
after the incident which may lead to the breakage of the
processes continuity, which in turn can have a meaning-
ful importance for the enterprise’s existence.

Acknowledgement

The publication was supported by the statutory grant
of Faculty of Mechanical Engineering, Silesian Univer-
sity of Technology in the year 2020.

REFERENCES

[1] T. Karkoszka, Emergency preparedness and response in
metallurgical processes, Metalurgija, 59 (2020) 2, 215-
217.

[2] T. Karkoszka, Process safety in metallurgical production,
Metalurgija, 59 (2020) 3, 393-395.

[3] Y. Y. Haimes, Toward a holistic approach to total risk ma-
nagement, The Geneva papers on risk and insurance – Is-
sues and practice, 17 (1992) 64, 314-321.

[4] Steel market developments Q2, OECD Publishing, Paris,
2020.

[5] ISO 9001 Quality management systems – Requirements,
ISO, Genève, 2015.

[6] ISO 14001 Environmental management systems, ISO,
Genève, 2015.

[7] ISO 22301 Security and resilience – Business continuity
management systems – Requirements, ISO, Genève, 2019.

[8] ISO/IEC 27001 Information technology – Security techni-
ques – Information security management systems – Requi-
rements, ISO, Genève, 2013.

[9] ISO 45001 Occupational health and safety management
systems – Requirements with guidance for use, ISO,
Genève, 2017.

[10] ISO 31000 Risk management – Guidelines, ISO, Genève,
2018.

[11] Enterprise Risk Management – Integrated Framework,
COSO, 2004.

[12] Overview of Enterprise Risk Management, CAS, 2003.
[13] A Risk Management Standard, FERMA, 2003.

Note: The professional translator responsible for English language is
Dominika Wnukowska, Katowice, Poland.

Copyright of Metalurgija is the property of Croatian Metallurgical Society and its content
may not be copied or emailed to multiple sites or posted to a listserv without the copyright
holder’s express written permission. However, users may print, download, or email articles for
individual use.

Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020 395

Trakia Journal of Sciences, Vol. 18, Suppl. 1, pp 395-400, 2020

Copyright © 2020 Trakia University

Available online at:

КАНДИДАТСТУДЕНТСКА КАМПАНИЯ 2024 Г.

ISSN 1313-3551 (online) doi:10.15547/tjs.2020.s.01.066

FINANCIAL MANAGEMENT IN THE ACTIVITY OF

INSURANCE COMPANIES

Ts. Andreeva

Finance Department, University of National and World Economy, Sofia, Bulgaria

ABSTRACT

The article defines the essence and justifies the need for financial management in the activities of

insurance companies.

PURPOSE: The aim of the article is to bring out the specifics of financial management in insurance

and outline the advantages of controlling as a function and part of the management of the insurance

company to ensure the necessary solvency.

METHODS: The systematic and structural approach, analysis and synthesis, including, study of

literature sources and analysis of the existing situation in the practice of the insurance company are

used.

RESULTS: The results are about highlighting the role of risk management in financial management, as

well as the importance of factors

–

gross technical provisions and others, for risk management of the

insurance company.

CONCLUSION: Тhe complex nature of financial management requires integrated risk management,

which requires the establishment of an independent unit and / or position in financial management and

risk management.

Keywords: financial management, controlling, risk, gross technical provisions

JEL: D81

INTRODUCTION

In order to function normally, the company

must have the necessary financial resources (1)

Raising capital to start, operate, return capital

and make a profit is the first prerequisite

for

financial management of the insurance

company, and in particular its finances.

The second prerequisite is a process of

providing funds for the realization of tactical

and strategic goals within a certain period.

There is a third difference, namely how

managers find the funds needed for the

financial activities of the insurance company.

The finances and financial activity of the

business organizations are leading and

determining in achieving profit. In the

insurance company, this goal is not made

explicit. It is pursued through the growth of the

volume of insurance activity, the collected

revenues from insurance premiums, increasing

market share, quality customer service and

meeting their needs.

The finance of the insurance company is a set

of financial relations arising from all cash

flows with which the insurance company is

related to other economic entities and to the

state. They express a system of financial

(monetary) relations between the insurance

company and other counterparties – insured,

banks, other insurance companies, co-insurers,

reinsurers, staff, structural units, the state, the

municipality and others. In a narrow sense of

the term, the essence of finance is associated

only with one-way monetary relations, in

which the participation of the insurance

company is not associated with the reverse

flow of money. (2)

The finances of the insurance company are

specific monetary relations, which can be

systematized in:

 Monetary relations with shareholders
in connection with a subsequent increase in

share capital and the payment of dividends;

 Monetary relations with insurers on
the occasion of concluding insurance contracts

КАНДИДАТСТУДЕНТСКА КАМПАНИЯ 2024 Г.

ANDREEVA TS.

396 Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020

and collecting the insurance premium, on the

one hand, and insurance payments in the event

of an insured event, in accordance with the

terms of the insurance contract, on the other

hand;

 Monetary payments with territorial
divisions (branches, agencies, representative

offices) on the occasion of settling external

settlements and commission payments;

 Monetary relations with insurance
intermediaries in connection with the premium

collected and paid (transferred) by them and

the payment of commissions;

 Monetary relations with the
institutions in which the insurance company is

a member (the Association of Insurers in

Bulgaria, the National Bureau of Bulgarian

Motor Insurers, the Guarantee Fund, etc.);

 Monetary relations with the banking
system in connection with opened current and

client accounts, receipt and repayment of

loans, etc. financial relations;

 Monetary relations with other
insurance companies related to regressive

claims and co-insurance;

 Monetary relations with staff in
connection with the accrual of remuneration

and deductions thereon;

 Monetary relations with subsidiaries,
associates and joint ventures and investment

intermediaries in connection with investment

activities;

 Monetary relations with the financial
and credit system of the state (budget, social

security) and with the state institution

performing regulation, control and supervision

– Financial Supervision Commission (FSC);

 Monetary relations with reinsurers on
the occasion of relinquished premium received

insurance indemnities, commissions,

participation in the result, formation of the part

of the reinsurer in the insurance reserves, etc.

Financial management supports the global

management of the

insurance

company.

Financial management is a mandatory

component of the business management of the

insurance company in a market economy. It is

important and necessary for all types of

business, both for insurance companies, banks

and other financial institutions, and business

organizations for production, trade, tourism,

i.e. from the real sector.

Financial management is performed by

financial managers, assisted by controlling

managers. (Figure 1)

The most important financial decisions are

made by the top management of the company.

Figure 1. Organizational structure of the insurance company and the place of financial management and

controlling in the management (3)

ANDREEVA TS.

Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020 39

7

This figure represents the positioning of the

Financial Manager and Controlling units in the

organizational structure of the joint-stock

insurance company with a two-tier

management system, as well as the

relationships that arise with the other units.

The financial management in the activity of the

insurance company contains in itself the

general features of the Financial management,

but it also has its specific features

characteristic for the insurance activity and

expressed in their purpose, tasks and functions.

The main goal of the Financial Management in

insurance is to integrate the functions of

management – planning (insurance – technical

planning), budgeting, forecasting, spending,

accounting, analysis and control in a single

system for managing financial resources. In the

process of fulfilling this main goal, two tasks

are solved – current (regular) and

extraordinary.

The current (regular) tasks of the Financial

Management in the insurance activity are:

 Related mainly to tracking and
controlling the incoming cash inflows and

outgoing cash payments in order to optimize

the financial condition of the insurance

company and ensure the security for correct

payment of the claims by the clients;

 Aimed at controlling current cash
flows, the conducted tariff policy, the

distribution of income and investments;

 Related to estimating and reducing the
risk of

the

insurance company.

Constant tasks – are aimed at providing the

necessary capital for development and

expansion of the insurance business by

acquiring new insurance products and services

and expanding the insurance market.

The fulcrums of insurance management related

to the management of financial resources are

objects, subjects and functions. (2)

The main objects of the Financial Management

in the insurance business are the capitals and

the insurance-technical reserves of the

insurance company, their formation,

organization, management and distribution of

all insurance payments for normal

implementation of the insurance activity.

Specific objects of the Financial Management

of the insurance company are the Financial

Risk Management, the investment, the credit,

the dividend policy and others.

Subjects of Financial Management in

Insurance are executive directors and their

deputies, owners, responsible actuaries,

experts, auditors, controlling specialists and

supervision of the insurance activity.

The main functions of the Financial

Management are:

 Financing;

 Investing;

 Forecasting and planning;

 Controlling.

The main functions performed by the Financial

Management in the insurance company have

their specifics:

 Insurance function – is related to the
use of the financial resources of the insurance

company for its normal and effective

functioning and implementation of their cycle

during the course of the insurance activity;

 Distribution function – distribution of
the income from the insurance activity in

accordance with the insurance-technical plan

and / or normative regulation;

 Reporting – observations for correct
documentation of data on conditions and

changes in carrying out insurance activities. In

this regard is the role of controlling as an

information-analytical activity that supports

management decisions and the successful

development of the insurance company;

 Control – covers the control of the
circulation of financial resources from the

insurance and economic activity, including the

formation, distribution and rational use of

financial resources;

 Investment – how much money and in
what specific assets to invest? (1, 4) Where

and in what way to provide the necessary

financial resources for investments? (1, 4)

The distribution of functions and tasks between

the individual insurance specialists is one of

the main tasks of the management of the

insurance company.

The coordination of the work between the

separate units in the structure of the insurance

company is carried out by the Controlling unit.

Controlling as an element of the organizational

structure of the insurance company (Figure 1)

assists the top management in making adequate

management decisions.

The management function “Controlling”

monitors compliance with obligations and

coordinates the implementation of tasks by

ANDREEVA TS.

398 Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020

jobs in the various units of the insurance

company.

Assists in making management decisions by the

members of the Supervisory Board and the Board

of Directors and participates in the work of the

General Meeting.

The controlling manager works in direct

connection with the financial manager and is

directly subordinated to the Executive Director of

the insurance company.

The specialists from the “Controlling” unit,

managed by the controlling manager, enter into

relations with the specialists from all units of the

senior and middle management.

The application of controlling in the activity of

business units places emphasis on controlling

costs and controlling results. In this aspect,

insurance companies are no exception.

Through controlling, the deviations of the actual

from the planned results at the moment of their

occurrence are ascertained and analyzed. In this

way the real reasons for the appearance of the

deviations are discovered, factors for the positive

(purposeful) acceleration of the process of their

elimination and the realization of the set goals of

the company are identified.

Taking into account the specifics of the insurance

activity in the analysis of cost deviations as a

method of control in insurance theory and

practice and distinguishes between the concepts

of “costs” and ” expenses”.

Costs are a broader concept and include

operating costs and risk-related payments.

Financial managers are aware that good

financial results from the activities of the
insurance company are achieved by managing

the risk that accompanies the insurance business.

(2) The content side of risk management and its

complex nature require its consideration as a

process and management through methods: risk

avoidance, risk reduction, damage control and

risk financing. (5, 6)

Risk financing is the financing of the

consequences of the occurrence of a risk.

Emphasis is placed on the technical risk due to

its importance for the overall risk exposure of the

insurance company.

The technical risk is reduced to a negative

deviation between the expected (calculated) and

the actual need of the insurance company to

cover the damages caused by the occurrence of

the risk.

In order to establish the existence of a possible

loss from the development of the risk for the

company, the actually incurred expenses in

connection with the development of the risk are

compared with the provided funds for covering

these expenses for a given period and for a given

insurance set. Includes on the one hand,

insurance payments and costs for assessing and

limiting claims, on the other hand, net premiums

collected and reserves set aside.

An important factor for the technical risk is the

technical reserves.

The largest share in the gross technical reserves

on the Bulgarian non-life insurance market are

the reserve for forthcoming payments (pending

payments) and the unearned premium reserve,

respectively with an average annual share for the

period from 2004-2008 of 51.38% and 48.08 %.

(Table 1) For the period 2013-2018, respectively

– 62, 2% and 36, 45%. (Table 2)

Тable 1. Gross technical provisions in non-life insurance for the period 2004 – 2008 (7)

№ Year Transfer-
premium

reserve

(thousand

BGN)

Reserve

for

unexpired

risks

(thousand
BGN)

Reserve for

forthcoming

payments

(thousand
BGN)
Reserve

fund

(thousand
BGN)

Reserve
for

bonuses
and

discounts

(thousand
BGN)

Other
reserves

approved
by the FSC

(thousand
BGN)

Total

(thousand
BGN)

Indices

basic chain

1 2004 196567 – 196384 2410 – – 395361 100 100

2 2005 257898 – 264751 1286 – 3509 527444 133,41 133,41

3 2006 340624 33 341163 1176 – 7724 690720 174,71 130,

96

4 2007 445885 44 455336 1649 217 – 903131 228,43 130,75

5 2008 535732 19 640852 1811 263 – 117867

7

298,13 130,51

Total

Average

annual

share

1776706

(48,08%)

96

–

1898486

(51,38%)

8332

(0,23%)

480

(0,01%)

11233

(0,30%)

3695333

(100%)

–

–

ANDREEVA TS.

Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020 399

Table 2. Gross technical provisions in non-life insurance for the period 2013 – 2018 (8)

№ Year Transfer-
premium
reserve
(thousand
BGN)
Reserve for
unexpired
risks
(thousand
BGN)
Reserve for
forthcoming
payments
(thousand
BGN)
Reserve
fund
(thousand
BGN)
Reserve for

bonuses and

discounts
(thousand
BGN)
Total
(thousand
BGN)
Indices
basic chain

1 2013 472861 16627 664524 5205 6069 1165286 100 100

2 2014 486158 17230 726241 5636 6615 1241880 106,57 106,57

3 2015 494119 13783 722044 7209 7207 1244362 106,79 100,20

4 2016 458068 12036 741734 4987 7032 1223857 105,03 98,35

5 2017 715367 20618 1424409 4340 7361 2172095 186,40 177,48

6 2018 864452 18232 1679432 3353 6206 2571675 220,69 118,40

Total
Average
annual
share

3491025

(36,45%)

58526

–

5958384

(62,2%)

30730

(0,32%)

40490

(0,42%)

9579155

(100%)

–

–

Three groups of factors can be distinguished

by importance, as elements of the technical

risk:

 Factors, due to accidental risk
diversion. In this case, the actual value of the

aggregate loss deviates from its expected value

because more in number and / or very large

damages occur by chance. The reasons are the

risk situation of the insured sites, the

possibility of an insurance event to affect many

of the insurance sites or the possibility of

occurrence of an event at one site to cause the

occurrence of an event at one site to cause the

occurrence of the same event and many other

sites;

 Factors related to the negative change
of the risk situation, respectively of the risk

circumstances, after the risk assessment has

already been made. Here, the deviation of the

actual value of the aggregate loss from its

expected value is due to a change in the risk

situation;

 Factors due to errors. In this case, the
deviation is the result of an incorrect

assessment of the development of risk. The

reasons for the erroneous assessment are

reduced to deficiencies related to the quantity

and quality of information, incorrect statistical

methods for processing the information,

incorrect interpretation of the available data

and calculation errors.

In addition to the listed groups of factors, other

factors that affect the technical risk are

derived. These are the type and size of the set

aside reserves and the number and

homogeneity of the objects in the separate

aggregates. Significantly less is the impact of

the amount of damage assessment costs. Last

but not least, attention is paid to the selection

of sites and risks for which the insurance

company offers insurance protection.

CONCLUSION

In the conditions of scale, complexity and

dynamics in the functioning of the economy,

the issue of the financial management of the

insurance company remains relevant.

Insurers manage huge funds and reserves and

their management requires a careful approach

from experienced and competent professionals.

This process must be continuous and

constantly evolving, an integral part of the

company’s strategy.

The complex nature of the Financial

Management requires integrated risk

management. This requires the establishment

of an independent unit and / or position in

financial management and risk management in

the organizational structure of insurance

companies to participate and fully monitor the

management process.

REFERENCES

1. Nenkov, D., Financial Management,
University Publishing House “Economy”,

UNWE, Sofia, 2008.

2. Neykov, M., Financial Management in
Insurance, Business Directions Magazine,

Burgas Free University, 1-2: 44-45, 50,

2010.

ANDREEVA TS.

400 Trakia Journal of Sciences, Vol. 18, Suppl. 1, 2020

3. Misheva, Ir., Controlling in the
management of the Insurance Company,

Research papers, UNWE, 2:67, 2014.

4. Brealey, R., St. Myers, Fr. Allen, Corporate
Finance, McGraw-Hill/Irwin, New York,

2006, p. 7

5. Andreeva, Ts., Risk Management of an
Insurance Company, University Publishing

House “Economy”, UNWE, Sofia, 2009.

6. Doff, R., Risk Management for Insurers –
Risk Control, Economic Capital and

Solvency II, Risk Books, London, 2007.

7. Financial Supervision Commission, annual
reports 2004-2008.

8. Financial Supervision Commission, annual
reports 2013-2018.

Copyright of Trakia Journal of Sciences is the property of Trakiiski Universitet and its content
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32 P

S

J PROFESSIONAL SAFETY DECEMBER 2020 assp.org

RIS

K MANAGEMENT

Peer-Reviewed

KEY TAKEAWAYS
•The concept of using the risk management process is fundamental
to assessing and managing all types of risk, including those created
by pandemics. It is a universal approach designed to better under-
stand risk and reduce uncertainty.
•This article presents the use of risk management and risk as-
sessment from a business continuity standpoint on the impacts of
COVID-19. The authors provide a risk-based perspective on the pan-
demic and its overall effects as it concerns OSH professionals and
their organizations.
•This article presents the use of risk management and risk as-
sessment from a business continuity standpoint on the impacts of
COVID-19. The authors provide a risk-based perspective on the pan-
demic and its overall effects as it concerns OSH professionals and
their organizations.
•The authors present a use of methods that incorporate risk sum-
mation to understand and communicate whole-system risk.

UUNCERTAINTY AND FEAR OF THE UNKNOWN are the real ene-mies. Investment strategist Jim Paulsen (as cited in Minkoff, 2020) described it this way: “Although the contemporary crisis is loaded with bad news, this has not been its primary problem. It is the ‘unknown.’ Give me bad news any day over complete uncertainty.” Paulsen’s point is that if we know what we are
dealing with, we are better prepared to manage it, whether or
not it is bad news.

From an enterprise and strategic perspective, “risk ” is
defined as “the effect of uncertainty on objectives” (ANSI/
ASSP/ISO, 2018). When an organization is faced with signif-
icant uncertainty (or undefined risk), it is negatively affected
in its ability to make decisions and successfully achieve its
business objectives.

On a more tactical and operational level, risk is known as the
likelihood of something occurring and the severity of its con-
sequences. Hazard and operational risks present only negative
effects such as harm to people and the environment, damage or
loss of assets and property, interruption of business operations,
and loss of income, market share and reputation, to mention a
few. There are also those types of risk that can present oppor-
tunities such as business ventures, investments, acquisitions,
expansions, and other financial and strategic risks that organi-
zations decide to pursue and manage.

The risk management process outlined in ISO 31000 and
31010 (Figure 1) provides a road map to anticipating, identify-
ing, assessing and managing risk. In this article, the authors
describe this process to examine how it can be applied to pan-
demic situations such as COVID-19.

Uncertainty
Uncertainty, strongly linked to probability, can occur in

several different ways including a lack of relevant knowledge
of the system (epistemic uncertainty), a random, unpredict-
able nature surrounding the system (aleatory uncertainty), a
vagueness or ambiguity inherent in spoken languages (lin-
guistic uncertainty), and uncertainty associated with value
systems, professional judgment, company values and societal
norms (decision uncertainty).

There will always be some degree of uncertainty and risk
in everything we do. Organizations and individuals are now
facing such uncertainty surrounding the COVID-19 pan-
demic. The actual impact of the pandemic goes far beyond
the health risks to people. As we have witnessed, the effects
of this pandemic have global implications that are unprece-
dented. Globally, businesses have been forced to shutter their
operations leaving only those manufacturers, service provid-
ers and transportation operations that fulfill essential needs
to the public. The surge of COVID-19 patients has caused an
overload to our healthcare systems, with some countries in
serious uncertain conditions. The economy has suffered as
indicated by the financial markets and their reactions to this
event, which cascades into other concerns such as job secu-
rity, ability to pay mortgages and bills, and healthcare costs.
The shortage of PPE such as N95 face masks and medical
equipment such as ventilators adds to the global stress level.
With many workplaces requiring employees to work from
home using personal computers and company-owned lap-
tops, the exposure to cyber threats such as phishing emails,
ransomware and malware infections increases. Psycholog-
ical stress from significant change in everyday life, social
isolation and uncertainty about the future is also a risk that
organizations must recognize and manage.

The Risk Continuum
Risk is dynamic and can be viewed as a continuum. It chang-

es with the emergence of new conditions, changes in variables,
risk drivers and exposures, degree of uncertainty, and effects
of applied risk treatments. A continuum can be defined as
a coherent whole characterized as a collection, sequence, or
progression of values or elements varying by minute degrees.
For example, the state of water within a range of temperatures
from freezing to boiling represents a continuum; water is a
solid when frozen, a liquid when at room temperature and a gas
when boiled. In risk management, risk can be viewed as being
in a continuum depending upon its point in the risk manage-
ment cycle. For this reason, risk management must not only in-

With COVID-19 & Its Impact
By Bruce K. Lyon and Georgi Popov

THE ROLE OF RISK

IG
O

R
IS

S/
IS

TO
C

K
/G

ET
TY

IM
A

G
ES

P
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assp.org DECEMBER 2020 PROFESSIONAL SAFETY PSJ 33

clude managing initial risks that have been identified, assessed
and treated, but also anticipate potential unknown risk, detect
emerging and developing risks, identify inherent risk and as-
sess initial risk, as well as previously treated risks, residual risks
and possible secondary risks created by risk treatments. This
continuous and dynamic process of risk is expressed in Figure 2
(p. 34) as the risk continuum.

Risk is derived from its risk source (e.g., hazards, operations,
financial and strategic) and influenced by risk drivers. Risk
treatments are designed to maintain control of the risk and pre-
vent exposure to assets or objectives. When a loss of control oc-
curs from a trigger or cause, exposure to the risk source results
in an incident or event that results in consequences and effects
on the objectives. A simplified relationship of elements within
the risk pathway is represented in Figure 3 (p. 34). Although the
illustration is linear, risk is often multidimensional and must be
considered as such.

Assessing Pandemic-Level Risk: COVID-19
R isk is dy na mic and continuously evolv ing w it h

changing conditions, risk drivers, risk treatments and
ot her variables. The risk pat hway for a pandemic such as
COVID-19 begins w it h t he risk source: a new v irus (Fig-
ure 3, p. 34). In t his case, t he risk drivers (conditions t hat
inf luence t he risk source) may include globa l travel, socia l
interactions, unk now n vectors and env ironmenta l con-
ditions. Exposures to t he risk source might include t he
orga nization’s employees a nd key personnel, its suppliers,
customers a nd contractors, possibly hea lt hcare prov id-
ers a nd waste ma nagement. At t his point, a trigger event
causes t he incident to occur such as loss of containment
of infected persons unk now ingly spreading t he infection.
Once t he spread reaches pandemic levels, t he consequenc-
es begin to be felt, including impacts on employees, op-
erations, supply chains, f ina ncia l conditions a nd overa l l
sur v ivabi lit y of t he organization.

Before the event occurs as part of business continuity plan-
ning, the organization must establish its own risk criteria and
context for managing risk. Its purpose is to customize the risk
management process to the organization, enabling effective
risk assessment and appropriate risk treatment. This involves
defining the purpose and scope of the process, understanding
the context, planning the approach to be taken and defining the
criteria for evaluation.

Risk criteria are the basis for risk-based decision-making and
action taken. Specifically, they are the criteria to determine 1.
how risk is to be analyzed; 2. outputs required from the analy-
sis; and 3. the most appropriate risk management techniques to
be used. Risk criteria are the defined reference points and mea-
surements used to evaluate and compare against the risk levels
determined in the risk analysis. To help demonstrate how the
risk management process can be applied to a pandemic scenar-
io, the following case study is provided.

Case Study
A U.S. company producing respirators and other supplies

was concerned about rising production costs. As a result,
the company considered outsourcing 50% of its production
to a manufacturer in China. As part of the arrangement,
the organization would need to send a team overseas to
train the personnel in the Chinese facility. In light of the
COVID-19 pandemic, the organization decided to send a
team of experienced risk assessors to perform a risk assess-
ment using established risk criteria including a 5×5 risk
matrix (Figure 4, p. 35).

t on Pandemics

FIGURE 1
THE RISK MANAGEMENT PROCESS

Scope, con-
text, criteria

Risk assessment

Risk
treatment

Recording and report

ing

C
o

m
m

u

n

ic
at

i

o
n

a
n

d
c

o
n

su
lt

at
io

n

M
o

n
it

o
ri

n
g

a
n

d
r

ev
ie

w

Risk
identification

Risk
analysis

Risk
evaluation

Note. Adapted from “Risk management: Guidelines (ISO 31000:2018),”
by ISO, 2018.

K MANAGEMENT

34 PSJ PROFESSIONAL SAFETY DECEMBER 2020 assp.org

Considering the complexity and nature of the risks, the team
reviewed the methods found in ISO 31010 and ASSP’s TR-
31010-2020 technical report, “Risk Management—Techniques
for Safety Practitioners” (Figure 5) and decided upon a modi-
fied what-if method called structured what-if risk assessment
(SWIFRA). SWIFRA expands the “what-if ” questions to in-
clude “how” and “why,” as well as incorporates risk estimations,
evaluation and recommended risk treatments (Lyon & Popov,
2020c). A portion of the resulting risk assessment is shown in
Figure 6 (p. 36).

One risk-reduction measure identified by the team was
daily disinfection of surfaces. Because of its low cost and

ready availability, bleach was initially suggested by the
purchasing department as the disinfectant solution. Un-
fortunately, the purchasing manager did not consult with
the production manager and was not aware that bleach may
damage sensitive equipment. Also, under certain conditions
bleach can create chlorine gas.

Other OSH risks were considered. A common complaint
during the winter months was minor respirator y irritation
due to low relative humidity. However, such minor issues
were not considered a priority since relative humidity and
temperature are not regulated and there are no OSHA stan-
dards related to indoor off ice temperature. Note: OSHA

FIGURE 2
THE RISK CONTINUUM

Anticipate Detect Identify Assess

Identify
Avoid

Treat Estimate

Unknown
risk

Emerging
risk

Inherent
risk

Initial
risk

Residual
risk

Future
state risk

Secondary
risk

Note. Adapted from “COVID-19: The Role of the Risk Management Process and Its Impact on Pandemics,” by B.K. Lyon and G. Popov, 2020a.

FIGURE 3
THE RISK PATHWAY OF COVID-19

Risk source:

New virus

Global travel,
environmental

conditions,
social interactions, un-

known vectors

Employees/key personnel,
suppliers, customers, contractors,

healthcare/deathcare,
waste management

Loss of containment,
infected parties,

spreading infection
Pandemic

Impacts to people,
business objectives,

supply chain,
financial,

overall survivability

Risk
drivers Exposure Trigger

Incident

ConsequencesConsequences

Note. Adapted from “COVID-19: The role of the risk management process and Its impact on pandemics,” by B.K. Lyon and G. Popov, 2020a.

assp.org DECEMBER 2020 PROFESSIONAL SAFETY PSJ 35

(n.d.) recommends that employers
maintain workplace temperatures in
the range of 68 to 76 °F and humidity
control in the range of 20% to 60%.
According to an OSHA (2003) inter-
pretation letter, “off ice temperature
and humidity conditions are generally
a matter of human comfort rather than
hazards that could cause death or seri-
ous physical harm. OSHA cannot cite
the general duty clause for personal
discomfort.” Controls for worker ex-
posure inside the facility concerning
infectious diseases were evaluated
using a simplif ied layers of protection
analysis (Figure 7, p. 36).

A brainstorming session was conducted
by a cross-functional team to consider the
additive effects of lower-level risks. It was
determined that using bleach presented a
secondary risk since chlorine affects the
respiratory system, weakening humans’
natural defenses. In addition, low humid-
ity (relative humidity = 11%) can dry out
the mucus that normally coats the nose
and airways, making it easier for the virus
to enter the body and cause infection.
Considering these additive effects, the
team estimated that the combined risk to
be “very high” (Figure 8, p. 37). To com-
municate the “big picture” to upper-level
management, the team presented its find-
ings in a striped bow-tie risk assessment
(Figure 9, p. 37).

Managing the Risks of a Pandemic
As demonstrated in the case study, the

potential effect of combined or whole-sys-

FIGURE 4
RISK MATRIX

1 2 3 4 5
Very

unlikely
Unlikely Possible Likely

Very
likely

5
Death or permanent total

disability
Catastrophic

damage
Significant

impact
5 10 15 20 25

4
Permanent partial disability;
hospitalizations of three or

more people
Severe damage

Significant but
reversible impact

4 8 12 16 20

3
Injury or occupational illness
resulting in one or more days

away from work

Significant
damage

Moderate
reversible impact

3 6 9 12 15

2
Injury or occupational illness
not resulting in lost workdays

Moderate
damage

Minimal impact 2 4 6 8 10

1
First aid only; no injuries or

illnesses
Light damage No impact 1 2 3 4 5

Very high risk = 15 or greater; high risk = 9 to 14; moderate risk = 5 to 8; low risk = 1 to 4

Incident outcomes

Severity
rating

Health effects (people)
Property
damage

Environmental
impact

Likelihood of occurrence

FIGURE 5
RISK MANAGEMENT PROCESS ASSOCIATED METHODS

Scope, con-
text, criteria
Risk assessment

Risk treatment

Recording and reporting
C
o
m
m

u
n

ic
at

io
n

a
n
d
c
o
n
su
lt
at
io
n
M
o
n
it
o
ri
n
g
a
n

d
re

vi
ew

Communication
•Risk matrix/heat map
•Radar/spider chart
•SWOT analysis
•Risk register
•Risk hierarchy
•Bow tie diagram
•Striped bow tie

Risk
analysis
Risk
evaluation

Context
•Risk criteria
•Risk scoring system
•ALARP
•Risk matrix
•Brainstorming
•Delphi technique
•Nominal group

Risk Assessment
•FMEA/FMECA
•HACCP
•LOPA/LOCA
•SWIFRA
•Striped bow tie
•Reliability assessment
•Human reliability
analysis
•Quantitative risk as-
sessment
•Major incident risk
•Exposure assessment
•Ergonomic risk assess-
ment

Treatment
•Hierarchy of controls
•Cost/benefit analysis
•Financial benefits
•Non-financial benefits
•Design safety review
•MOC
•Barrier analysis
•LOPA/LOCA

Identification
•Brainstorming
•Pareto analysis
•Checklists
•Multiple why
•Interviews
•Surveys
•Delphi technique
•Nominal group
•PHA
•HAZID/RISKID
•What-if/SWIFT
•HAZOP
•Design safety review
•Fishbone analysis
•Cindynic approach
•Causal mapping

Analysis
•PHA
•HAZOP
•Scenario analysis
•Fault tree analysis
•Event tree analysis
•Bow tie analysis
•BIA
•Markov analysis
•Cross impact analysis
•MCDA

Evaluation
•Risk indices
•Risk matrices
•ALARP/SFAIRP
•Monte Carlo

Monitor & Record
•Risk-based audits
•KPIs
•KRIs
•Risk register

Risk
identification

Note. Reprinted from “Managing Risk Through Layers of Control,” by B.K. Lyon and G. Popov, 2020, Professional Safety, 65(4), p. 30.

36 PSJ PROFESSIONAL SAFETY DECEMBER 2020 assp.org

tem risk is often greater than its individual risks. If risks are an-
alyzed individually without considering additive (summation)
effects, the whole-system risk can be underestimated.

A single control is rarely adequate. To effectively reduce risk,
both preventive and mitigative measures must often be used
(Lyon & Popov, 2020b). Using a hierarchy of risk treatment
model such as the one shown in Figure 10 (p. 38), layers of
control should be selected and applied to effectively reduce and
maintain risk at an acceptable level.

In terms of a pandemic, layers of multiple control meth-
ods are necessary to adequately reduce the risk. This can be
illustrated using the risk pathway model for the COVID-19

scenario presented in Figure 11 (p. 39).
In the model, the risk control strategies
are applied in layers to both 1. prevent
exposure; and 2. mitigate the impact. The
layers of control for the COVID-19 pan-
demic scenario in Figure 11 (p. 39) are
briefly explained as follows:

1. Consider avoidance and elimi-
nation strategies such as eliminating
travel to hot zones and temporarily
relocating operations.

2. Substitution may be possible by substi-
tuting or replacing the exposure that occurs
in office environments with remote or isolat-
ed work, use of teleconferencing for in-per-
son meetings, and use of less toxic cleaning
and disinfecting chemicals. In addition, the
separation of critical personnel may be nec-
essary to ensure business continuity.

3. Incorporate engineering controls to reduce the ef-
fects on the business from a pandemic such as COVID-19.
Engineering controls might include robust informational
technology systems to accommodate relocated workers
and protect the organization’s data and intellectual prop-
erty (e.g., VPN, remote access to office files, laptops, an-
timalware). For healthcare and other essential operations
that remain open, good ventilation systems equipped with
high-efficiency particulate air filtering and 50% relative hu-
midity, use of ultraviolet light systems to disinfect surfaces,
and isolation of infected patients in controlled environments
from the general population may be needed.

FIGURE 6
STRUCTURED WHAT-IF RISK ASSESSMENT (SWIFRA)

Note. Reprinted from “COVID-19: The role of the risk management process and Its impact on pandemics,” by B.K. Lyon and G. Popov, 2020a.

FIGURE 7
LAYERS OF PROTECTION ANALYSIS OF COVID-19

Note. Adapted from “COVID-19: The role of the risk management process and Its impact on
pandemics,” by B.K. Lyon and G. Popov, 2020a.

assp.org DECEMBER 2020 PROFESSIONAL SAFETY PSJ 37

4. Consider administrative measures and procedures such as
limiting public exposure, physical distancing, training in prop-
er hygiene, use of thermal imaging cameras to detect elevated
body temperatures and frequent cleaning of surfaces.

5. PPE such as N95 face masks, eye protection and imperme-
able gloves for those who have a potential of exposure to infec-
tion is required.

From a mitigative standpoint, plans developed well in
advance of an event should be activated during the pan-
demic to reduce the impact of consequences. These include
business continuity plans, communication and employee
assistance plans, crisis management plans, and access to
emergency funds. These layers of control work in concert
to reduce the overall impact to the organization and help
ensure resiliency.

These layers of control can be entered into the layers of con-
trol analysis, which includes a risk assessment of preventive and
mitigative risk reduction. An example is presented in Figure 12.

With this information, the risk management team can
provide more details in their risk treatment plans. For ex-
ample, by increasing the relative humidity, a reduction of

respiratory system dryness and irritation is achieved leading
to less coughing in the workplace. Nasal systems and mu-
cous membranes are more sensitive to infections at very low
relative humidity of 10% to 20% and, therefore, additional
humidification in winter seasons is sometimes suggested.
In fact, recent studies state that low humidity “prevented
cilia, which are hairlike structures in airways cells, from re-
moving viral particles and mucus. It also reduced the ability
of airway cells to repair damage caused by the virus in the
lungs” (Yale University, 2019).

Lessons can also be learned from environmental remediation
companies regarding the substitution of bleach with less toxic
and equally or more effective disinfectants. In fact, EPA-regis-
tered products often used in mold remediation are proven to be
effective against human coronaviruses. By substituting bleach
with EPA-registered fungicides or disinfectants, the potential
for chlorine exposure is eliminated, leading to less respiratory
irritation and less coughing.

Better f iltration, physical distancing, separation of crit-
ical personnel and operations using two shifts instead of
one, and PPE should be considered. Having two shifts will

FIGURE 8
LAYERS OF PROTECTION RISK SUMMATION FOR COVID-19

Note. Adapted from “COVID-19: The role of the risk management process and Its impact on pandemics,” by B.K. Lyon and G. Popov, 2020a.

FIGURE 9
STRIPED BOW-TIE RISK ASSESSMENT CURRENT STATE

Note. Adapted from “COVID-19: The role of the risk management process and Its impact on pandemics,” by B.K. Lyon and G. Popov, 2020a.

38 PSJ PROFESSIONAL SAFETY DECEMBER 2020 assp.org

enable suff icient distance between workers (having more
space) and business continuity. If one shift becomes in-
fected and quarantined, the other can continue to produce
critical supplies.

Infectious Disease Preparedness & Response
The risk of an infectious disease outbrea k, epidemic

or pa ndemic in t he workplace must be ma naged so t hat
a n orga nization ca n continue to protect its employees,
operate sa fely a nd achieve its objectives. This requires
t hat t he orga nization develop a n infectious disease pre-
paredness a nd response plan a head of time w it h interna l
trigger points for implementation and response. Such a
pla n shou ld be developed in accorda nce w it h g uida nce
from CDC a nd OSHA as wel l as state a nd loca l agencies,
medica l exper ts and key personnel (e.g., lega l, human
resources, insurance, customers, distributors, suppliers,
ot her key sta keholders). In addition, t he plan shou ld be
integrated into t he organization’s safet y and hea lt h man-
agement system, and business continuit y, crisis manage-
ment and communication plans.

Key elements in an infectious disease preparedness and
response plan might include roles and responsibilities,
exposure assessment, infectious disease task force, safety
protocols, exposure response actions, recordkeeping and
reporting, and plan review.

Roles & Responsibilities
Both managers and employees have important roles in

providing and maintaining a safe workplace during infec-
tious disease outbreaks. A breakdown of the responsibilities
for leadership and employees concerning infectious disease
prevention, communication and action plans should be de-
f ined and effectively communicated.

Exposure Assessment
OSHA (2020) outlines steps em-

ployers should take to protect the
safety and health of their workforces
including the development of an
infectious disease preparedness and
response plan. The plan should con-
sider and address the level of risk as-
sociated with various work sites and
tasks workers perform by the orga-
nization (Figure 13, p. 40). The fol-
lowing risk category classifications
should be used to guide the details of
the response plan (OSHA, 2020):

•Ver y high exposure risk groups
include healthcare workers (e.g.,
doctors, nurses, dentists, paramed-
ics, emergency medical technicians)
performing aerosol-generating pro-
cedures (e.g., intubation, cough in-
duction procedures, bronchoscopies,
some dental procedures and exams,
invasive specimen collection) on
k nown or suspected COVID-19 pa-
tients, and healthcare or laborator y
personnel collecting or handling
specimens from k nown or suspected
COVID-19 patients.

•High exposure risk jobs include healthcare delivery and
support staff (e.g., doctors, nurses, hospital staff who must enter
patients’ rooms) exposed to known or suspected COVID-19
patients, and medical transport workers moving known or sus-
pected COVID-19 patients in enclosed vehicles.

•Medium exposure risk jobs include those that require
frequent or close contact (i.e., within 6 ft) with people who
may be infected with COVID-19 but who are not known or
suspected COVID-19 patients. In areas where the COVID-19
virus has been identified, this may include workers who
come in contact with the public, including in schools or re-
tail settings.

•Lower exposure risk jobs are those that do not require
contact with people known to be or suspected of being in-
fected with COVID-19 nor frequent close contact with the
general public.

In addition to consideration of workers’ risks, the plan
should take into account contingencies that may arise
during outbreaks, including:

•increased rates of worker absenteeism
•the need for social distancing, staggered work shifts, down-

sizing operations, delivering services remotely and other expo-
sure-reducing measures

•options for conducting essential operations with a reduced
workforce, including cross-training workers across different
jobs to continue operations or deliver surge services

•interrupted supply chains or delayed deliveries

Infectious Disease Task Force Team
The plan should establish a cross-functional team responsi-

ble for guiding and overseeing workplace protocols to control
the spread of infectious diseases such as COVID-19. The team
should include key members from senior management, human
resources, legal, facilities, operations, key employees and other

FIGURE 10
HIERARCHY OF RISK TREATMENT MODEL

Note. Reprinted from “Moving Risk Assessment Upstream to the Design Phase,” by B.K. Lyon and G.
Popov, 2019, Professional Safety, 64(11), 32.

assp.org DECEMBER 2020 PROFESSIONAL SAFETY PSJ 39

stakeholders. The team should consider and select appropriate
control measures to prevent and reduce the risk of infectious
disease exposures in the workplace as outlined by OSHA. These
options include:

1. avoidance and elimination such as avoiding travel to high-
risk areas and eliminating face-to-face meetings

2. substitution of less harmful substances or methods
such as replacing chlorine bleach cleaner with an EPA-reg-
istered disinfectant and teleconferencing rather than
in-person meetings

3. engineering controls such as air filters, increased ventila-
tion and physical barriers

4. administrative controls such as requiring sick workers to
stay home, minimizing contact among workers by avoiding

face-to-face meetings, discontinuing nonessential travel and
creating emergency communication plans

5. safe work practices such as promoting personal hygiene
practices (handwashing)

6. PPE such as gloves, face masks, goggles and respiratory
protection, when appropriate

Safety & Health Protocols
An important part of the plan are formal safety and

health protocols for employees, as well as contractors, cus-
tomers and other third parties to be implemented in the
event of an outbreak. These protocols should incorporate
the layers of control using the hierarchy of risk treatment.
Such protocols include general safety and health practices

FIGURE 12
LAYERS OF CONTROL ANALYSIS OF COVID-19

Note. Adapted from “COVID-19: The role of the risk management process and Its impact on pandemics,” by B.K. Lyon and G. Popov, 2020a.

FIGURE 11
THE RISK PATHWAY OF COVID-19

Risk
source:

New virus
Global travel,
environmental
conditions,
social interactions, un-
known vectors
Employees/key personnel,
suppliers, customers, contractors,
healthcare/deathcare,
waste management
Loss of containment,
infected parties,
spreading infection
Pandemic
Impacts to people,
business objectives,
supply chain,
financial,
overall survivability

Trigger Incident

Avoid/elim-
inate travel

to hot zones,
relocate oper-

ations

Substitute re-
mote working,
teleconferenc-
ing, less toxic
disinfectants,

segregation of
key personnel

Robust IT sys-
tem, isolation of
infected, HEPA

ventilation, 50%
humidity, UV

lights, physical
distancing, in-
frared imaging

temperature

Hygiene,
hand wash-

ing

Self-quaran-
tine, PPE

Business
continuity plans,

employee
assistance,

communication,
emergency funds

Note. Adapted from “COVID-19: The role of the risk management process and Its impact on pandemics,” by B.K. Lyon and G. Popov, 2020a.

Risk
drivers

Exposure

ConsequencesConsequences

40 PSJ PROFESSIONAL SAFETY DECEMBER 2020 assp.org

(as outlined by CDC, OSHA and this article); policies for
avoiding exposure (e.g., travel bans, remote work); sani-
tation, disinfection and hygiene; facility and workstation
physical modif ications and engineering controls; admin-
istrative policies; PPE supplies and use; policies for man-
aging contractors, visitors and third parties; training and
monitoring; and other related protocols.

Exposure Response, Recordkeeping & Reporting
The plan should outline guidance for how the organization

will respond to employee exposure and infection, and establish
protocols for quarantine, medical testing and return-to-work
procedures. Recording and reporting work-related exposures
should be included in the plan, adhering to federal, state and
local requirements.

Conclusion
Because the uncertainty from a global pandemic can sig-

nificantly affect organizations, it is critical to be prepared
for such risks in advance. As part of an organization’s busi-
ness continuity planning, risk assessment and risk man-
agement methods should be used to address pandemic level
risks such as COVID-19.

Rarely is one control met hod adequate in preventing
or protecting people, proper t y or env ironment from
harm. The layering of controls a nd defenses has been
used t hroughout t he years and has proven to be ef fective

in reducing t he risk from mu ltiple t hreats. OSH profes-
siona ls shou ld consider t his approach for t he workplace
when a na lyzing a nd designing risk reduction measures by
including bot h preventive and mitigating controls. Using
met hods such as what-if a na lysis, SWIFR A, bow-tie dia-
gra ming, a nd layers of control a na lysis to a na lyze control
ef fectiveness and estimate risk summation can help OSH
professiona ls identif y wea k nesses a nd needs for bui lding
additiona l layers of control. PSJ

References
ANSI/ASSP/ISO. (2018). Risk management—Guidelines (ANSI/

ASSP/ISO 31000-2018).
ANSI/ASSP/ISO/IEC. (2019). Risk management—Risk assessment

techniques (ANSI/ASSP/ISO/IEC 31010-2019).
Lyon, B.K. & Popov, G. (2019, May). Risk treatment strategies: Har-

monizing the hierarchy of controls and inherently safer design con-
cepts. Professional Safety, 64(5), 34-43.

Lyon, B.K. & Popov, G. (2020a, March). COVID-19: The role of the
risk management process and its impact on pandemics [Webinar].
www.assp.org/resources/covid-19/webinars/covid-19-the-role
-of-the-risk-management-process-and-its-impact-on-pandemics

Lyon, B.K. & Popov, G. (2020b, April). Managing risk through lay-
ers of control. Professional Safety, 65(4), 25-35.

Lyon, B.K. & Popov, G. (2020c, June). The power of what-if: Assess-
ing and understanding risk. Professional Safety, 65(6), 36-43.

Minkoff, Y. (2020, March 17). Futures swing between gains and
losses in volatile action. Seeking Alpha. https://seekingalpha.com/
news/3552354-futures-swing-gains-and-losses-in-volatile-action

OSHA. (n.d.) Indoor air quality investigation: Recommendations
for the employer. www.osha.gov/dts/osta/otm/otm_iii/otm_iii_2
.html#5

OSHA. (2003, Feb. 24). Standard interpretation: OSHA policy on in-
door air quality: Office temperature/humidity and environmental to-
bacco smoke. www.osha.gov/pls/oshaweb/owadisp.show_document?p
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OSHA. (2020). Guidance on preparing workplaces for COVID-19
(Publication No. 3990-03-2020). www.osha.gov/Publications/OSHA
3990

Yale University. (2019). Flu virus’s best friend: Low humidity.
ScienceDaily. www.sciencedaily.com/releases/2019/05/190513155635
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FIGURE 13
OSHA’s OCCUPATIONAL RISK
PYRAMID FOR COVID-19

Very
high

High

Medium

Lower risk (caution)

Note. Adapted from “Guidance on Preparing Workforces for
COVID-19 (Publication No. 3990-03-2020),” by OSHA, 2020.

Bruce K. Lyon, P.E., CSP, SMS, ARM, CHMM, is vice president with
Hays Cos. He is chair of the ISO 31000 U.S. TAG, vice chair of ANSI/ASSP
Z590.3, advisory board chair to University of Central Missouri’s (UCM) Safety
Sciences program, and a director of BCSP. Lyon is coauthor of Risk Manage-
ment Tools for Safety Professionals and Risk Assessment: A Practical Guide
to Assessing Operational Risk. He holds an M.S. in Occupational Safety Man-
agement and a B.S. in Industrial Safety from UCM. In 2018, he received the
CSP Award of Excellence from BCSP. Lyon is a professional member of ASSP’s
Heart of America Chapter, and a member of the Society’s Ergonomics and
Risk Management/Insurance practice specialties.

Georgi Popov, Ph.D., CSP, QEP, SMS, ARM, CMC, FAIHA is a pro-
fessor in the School of Geoscience, Physics and Safety Sciences at UCM. He
is coauthor of Risk Assessment: A Practical Guide for Assessing Operational
Risk and Risk Management Tools for Safety Professionals. Popov holds a
Ph.D. from the National Scientific Board, an M.S. in Nuclear Physics from
Defense University in Bulgaria and a post-graduate certification in environ-
mental air quality. He graduated from the U.S. Army Command and General
Staff College in Fort Leavenworth, KS. Popov is the chair of ANSI/ASSP
Z590.3, vice chair of ISO 31000 U.S. TAG, a professional member of ASSP’s
Heart of America Chapter and a member of the Society’s Risk Management/
Insurance Practice Specialty. He received the chapter’s 2015 Safety Profes-
sional of the Year (SPY) Award and the 2016 ASSP Region V SPY Award. In
2017, Popov received ASSP’s Outstanding Safety Educator Award.

Because the uncertainty from a
global pandemic can significantly

affect organizations, it is critical to be
prepared for such risks in advance.

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