What Is Loss Management?

The term loss management refers to a set of business practices that are used to monitor, detect, correct, or control sources of financial damage to a company's earnings. Improvements aimed at loss management involve changes in a business's operating policies, processes, and practices in order to minimize instances of loss. As such, loss management is often considered a form of risk management, as it helps mitigate and prevent risks to the company's financial health. Company managers may work with consultants and insurance industry specialists to improve a business's loss management practices.

Key Takeaways

  • Loss management is a set of business practices that aims to reduce or eliminate business costs related to accidents or theft.
  • Businesses can use proactive or reactionary measures as part of their loss management strategies.
  • Many insurance companies provide guidance and expertise used in loss management.
  • Modern technology aims to improve the prediction and prevention of costly losses.

Understanding Loss Management

Businesses are exposed to many types of risks. Some risks are inevitable and just can't be avoided while others are specific to certain industries. Regardless of what kind they are, these risks pose threats to a company's ability to make money and often lead to losses. This is where loss management comes into play.

Loss management involves the development and implementation of policies and best practices that are designed to identify and minimize any risks that can lead to losses. Also referred to as loss control, loss management can be proactive or reactionary in nature. For instance, a factory manager may improve machinery on the floor before or after flaws in the manufacturing process create substantial losses for the company. Similarly, hospitals may decide to install backup energy systems just in case there's a problem—not after a disaster occurs. Theft of company property and accidental damage to products are also sources of loss for many businesses.

Unsurprisingly, insurance companies provide much of the guidance and expertise used in loss management. Business insurers assess the quality of risk management in a business as a condition of extending coverage. They also may provide training and advice on a continuing basis to their clients, with a focus on workplace safety.

Loss control insurance policies help businesses identify and address hazards or areas of potential loss.

Types of Loss Management

As mentioned above, virtually every business has a unique set of challenges that pertain to loss management. A retailer's challenges include shoplifting, damage to display goods, and lawsuits related to customers slipping on icy sidewalks outside their stores, to name a few. Many other techniques rely on the psychology of thieves. Studies show that a sign warning against shoplifting is twice as effective if it is illustrated with a pair of wide-open eyes.

Other loss management techniques include training employees to spot suspicious activity. By raising knowledge levels about loss prevention, businesses can empower their biggest asset, their workers, to act as the first line of defense against unwanted loss and risk.

Advancements in data gathering and analytics have improved businesses' loss prevention and loss management techniques. Using tactics similar to predictive policing methods, sophisticated loss management capabilities can now leverage mathematical, predictive, and analytical techniques to spot elevated levels of risk.

Examples of Loss Management

As noted above, loss management strategies are used by many different industries, including the retail industry and in the hospitality industry.

Loss Management in the Retail Industry

Shoplifting is one of the biggest challenges that retailers face. Retailers use a variety of loss management methods to discourage or prevent theft. These steps include attaching magnetic security tags to clothing, displaying small items of high value in locked glass cases, and securing merchandise with thin wires or cables. Jewelry retailers often audit their inventories on a daily basis.

Despite these measures, retailers still face billions of dollars in losses. According to the National Retail Federation (NRF), the industry lost $61.7 billion in 2019 due to shrinking, which includes shoplifting, employee theft, and other types of theft.

Loss Management in the Hospitality Industry

Employee and guest safety is an integral part of the hospitality industry. Accidents and other incidents that threaten the safety and security of workers and those who use a business's facilities can result in lawsuits and, ultimately, financial losses.

The hospitality industry can mitigate the risks that result in safety- and security-related losses by installing security equipment, regular training of employees and management, as well as identifying and addressing issues that may lead to accidents.