IMch08 - CHAPTER 8 Selecting and Implementing Risk...

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CHAPTER 8 Selecting and Implementing Risk Management Techniques AVOID RISKS IF POSSIBLE IMPLEMENT APPROPRIATE LOSS CONTROL MEASURES Analyzing Loss Control Decisions Present Value Analysis An Example SELECT THE OPTIMAL MIX OF RISK RETENTION AND RISK TRANSFER General Guidelines Selecting Retention Amounts The Deductible Decision The Self-Insurance Decision IMPLEMENTING DECISIONS Risk Manager versus Insurance Agent Organization for Risk Management Commercial Risk Management Managing a Risk Management Program SUBJECTIVE RISK MANAGEMENT Obtaining More Information Group Discussion ENTERPRISE RISK MANAGEMENT AND ALTERNATIVE RISK TRANSFER Alternative Risk Transfer Tools KEY TERMS AND CONCEPTS Net present value Present value Third-party administrator Opportunity cost Risk management policy ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1. Risk management decisions must be reviewed regularly because so many relevant factors change. The nature of an exposure may change over time, or the frequency and severity of losses may vary, causing estimates to become out of date. The selection of appropriate techniques is a dynamic, not static process. 2. One step is to avoid risks, if possible. The second is to implement appropriate loss control measures. The third is to select the optimal mix of risk retention and risk transfer. 3. Effective loss control can reduce the frequency and severity of expected losses. This reduction may provide the opportunity for a company to retain more than it would without the loss control techniques. The company may decide to take a higher deductible or self-insure. 4. $793,832.24, calculated as: $1,000,000 / 1.08 3 . 5. Some of the inflows to be considered are reduced costs resulting from loss reduction, premium savings, tax savings resulting from depreciation of loss control equipment, and possibly some salvage value of the equipment. The outflows are the costs of training and maintenance of the equipment.
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This note was uploaded on 07/04/2010 for the course FIN 319 taught by Professor Briar during the Spring '10 term at Citadel.

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IMch08 - CHAPTER 8 Selecting and Implementing Risk...

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