CH 8: Risk Treatment

Question 1

Available techniques to treat risk:

Answer 1

• Risk Control*
  1. Avoid Risk
  2. Modify the likelihood and impact of risk
• Risk Financing*
  3. Transfer the risk
  4. Retain the risk
  5. Exploit the Risk: e.g: take over an abandoned line of products.

Question 2

What is the difference b/w risk prevention and reduction?

Answer 2

1. Reduce frequency

2. Reduce severity

Question 3

What is risk retention?

Answer 3

(used for residual risk) a risk financing technique that involves assumption of risk in which gains and losses are retained within the org.

Question 4

Risk financing:

Answer 4

A conscious decision to act or not to act that generates funds to offset the variability in cash flows that may occur as an outcome of risk.

Question 5

What two techniques are characterized by risk financing?

Answer 5

1. risk retention (deductibles– use our own money)

2. risk transfer (losses that are above the deductible– use other’s money)

Question 6

Two ways of transferring risk?

Answer 6

Insurance

non-insurance

Question 7

When is insurance appropriate?

Answer 7

When you don't have money.
When severity (consequence and impact) is high, and frequency (probability) is low.

Question 8

When is non-insurance (retention) appropriate?

Answer 8

When severity is low, and frequency is low.

Question 9

Risk treatment matrix:

Answer 9

X-axis: Severity (high -> low)
Y-axis: Frequency (high -> low)

high-high: Avoid
low-high: modify
high-low: insurance
low-low: retain