R.M. Ch. 3 Flashcards
Risk Management
is a process that identifies risks faced by an organization and selects the most appropriate techniques for treating such risks.
Risk Management Process
a) Identify Risk
b) Evaluate Risk
c) Select the appropriate risk management techniques
d) Implement and monitor the risk management program
Risk Control
refers to techniques that reduce the frequency and/or severity of losses
Risk Financing
refers to techniques that provide for the funding of losses
Retention
means that the firm retains part or all of the losses that can result from a given loss
Non-insurance transfer
is a method other than insurance by which risk is transferred to another party
Advantages Retention
save money
encourage loss prevention
increase cash flow
Cost of Risk
is a risk management tool that measures certain costs.
includes premiums paid, retained losses, outside risk management services and other expenses
Types of Financing
a) Retention
b) non-insurance transfers
c) commercial insurance
Deductible
is a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured.
is a form of risk retention
Avoidance
a loss exposure is never acquired or an existing loss exposure is abandoned.
Loss Prevention
refers to measures that reduce the frequency of a particular loss
Loss Reduction
refers to measures that reduce the severity of a loss after it occurs.
Disadvantages of Retention
possible higher losses
possible higher expenses
possible higher taxes
Advantages of Non-ins. Transfer
- Save money
- Can transfer some losses that are not insurable
- Can transfer loss to someone who is in a better position to control losses
Disadvantages of Non-ins. Transfer
- Transfer may not be legally enforceable
- If the other party fails to pay, firm is still responsible for the loss
- Insurers may not give credit for transfers
Insurance
is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses
Advantages of Insurance
- Firm is indemnified for losses
- Uncertainty is reduced
- Insurers may provide other risk management
services - Premiums are tax-deductible
Disadvantages of Insurance
- Premiums may be costly and are usually paid up front
- Negotiation of contracts takes time and effort
- Possible reduction in loss control
When is insurance appropriate to use?
low frequency and high severity
