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2.
Risk management is broad, it includes non insurable risk. It utilizes all techniques and
insurance is one of the techniques.
Insurance management only manages insurable risk and insurance is the main
technique to manage the insurable risk.
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(a) Risk control refers to techniques that reduce the frequency and
severity of accidental losses. Specific techniques are avoidance,
loss prevention, and loss reduction.
(b)
(1) Avoidance means that a loss exposure is never acquired,
or an existing loss exposure is abandoned. The major
advantage of avoidance is that the chance of loss is zero if
the loss exposure is never acquired. However, abandonment
may still leave the firm with a residual liability exposure from
the sale of previous products.
(2) Loss prevention refers to measures that reduce the
frequency of a particular loss. For example, measures that
reduce lawsuits from defective products include installation of
safety features on hazardous products, warning labels on
dangerous products, and quality control checks.
(a) Risk financing refers to techniques that provide for the funding
of losses after they occur. Specific risk financing techniques include
retention, noninsurance transfers, and insurance.
(b)
(1) Retention means that the firm retains part or all of the
loss that can result from a given loss exposure. Retention can
be active or passive. Active risk retention means that the firm
is aware of the loss exposure and plans to retain part or all of
it. Passive risk retention, however, is the failure to identify a
loss exposure, failure to act, or forgetting to act.
(2) Noninsurance transfers are methods other than insurance
by which a pure risk and its potential financial consequences
are transferred to another party. Examples include contracts,
leases, and hold-harmless agreements.
(3) Commercial insurance can also be used to fund losses.
Insurance is appropriate for loss exposures that have a low
probability of loss but the severity of loss is high.
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(a) Insurance has several advantages in a risk management
program:
The firm will be indemnified after a loss occurs.
Uncertainty is reduced, which permits the firm to lengthen
its planning horizon.
Insurers can provide valuable risk management services,
such as loss control, identification of loss exposures, and
claims adjusting.
2.
(a) The following advantages may result from the retention
program:
(1) The Swift Corporation can save money if its actual losses
are less than the loss allowance in the insurers premium.
(2) There may also be sizable expense savings.
(3) Loss prevention is encouraged.
(4) Cash flow may be increased since the firm can use the
funds that normally would be held by the insured.
The major disadvantages include:
(1) The losses retained by the firm may be greater than the
loss allowance in the insurance premium that is saved by not
purchasing the insurance, and there may be greater volatility
in the firms loss experience in the short run.
(2) Expenses may actually be higher, since loss-prevention
programs should be established, which may be provided by
insurers more cheaply.
(3) Contributions to a funded reserve under a retention
program are not usually income tax-deductible.
(b) The following factors should be considered in the decision to
partially retain the collision loss exposure:
(1) Average frequency and severity of losses
(2) Companys past loss experience
(3) Dollar amount of losses the firm will retain
(4) Added costs of retention (administrative problems)
(5) Elements of the premium that could be saved (potential
premium savings)
(6) Predictability of losses
(7) Maximum possible loss and maximum probable loss
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