RMIN4000 HW2 - Davis Franck and Kerry Orrick Homework 2...

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Davis Franck and Kerry Orrick Homework 2 RMIN4000 March 26, 2007 1. Retention is a risk management mechanism used for low severity and low frequency losses. It is an assumption of the risk. It can be either planned or unplanned. Planned retention involves a recognition that a certain loss could occur. The risk is assumed and it is decided that retention is the best risk management technique. Unplanned retention means that a firm does not recognize a risk and believes that no loss could occur. Even if a risk is recognized it can still be unplanned retention though. This may happen when the actual loss is significantly greater than the expected loss. This is unplanned retention simply because the expected loss was understated. The difference between funded and unfunded retention is that in funded retention there are pre-loss financial arrangements made in case a loss occurs. This can be done through credit, reserve funds, and self insurance. Unfunded retention simply accepts certain losses as part of the overall cost. No planning is done to pay for the losses and they are paid from the firm’s current revenues.
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