Chapter 2: Managing Risks Flashcards
RISK MANAGEMENT PROCESS
- Identification
- Measurement
- Methods to treat risk
- Administration
RISK MANAGEMENT
Objective is to preserve the assets and income against possibility of accidental loss.
RISK CONTROL
Minimize the frequency and severity of losses
RISK AVOIDANCE
Choice not to incur a possible loss or eliminate existing
LOSS PREVENTION AND REDUCTION
Prevention-measures to lower the probability or frequency of loss
Reduction-measures to reduce the severity of loss
NONINSURANCE TRANSFERS
Use of a contract between parties to transfer responsibility
RISK FINANCING
Techniques used to pay for any losses that occur
RISK RETENTION
Retains risk of financial burden of any losses
Planned-purposeful (high frequency; low severity)
Unplanned-risks unknown; fail to evaluate need for; unaware of insurance
SELF INSURANCE
Formal fund established to deal with potential losses
CAPTIVE INSURER
Create a subsidiary of company to write own insurance
RISK TRANSFER
Shifts possible financial consequences of risks
- noninsurance contracts
- insurance
HOLD-HARMLESS AGREEMENT
Noninsurance transfer that transferee agrees to pay claims if the fall on transferor
INSURANCE EQUATION
Equality between sources of income and uses of income
SOURCES OF INCOME
Premiums + Investment Earnings + Other Income
USES OF INCOME
Covered losses + Cost of doing business + Profits
