IMch05 - CHAPTER 5 Risk Management Techniques Noninsurance...

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CHAPTER 5 Risk Management Techniques: Noninsurance Methods RISK AVOIDANCE LOSS CONTROL Types of Loss Control Focus of Loss Control Timing of Loss Control Decisions Regarding Loss Control Potential Benefits of Loss Control Potential Costs of Loss Control RISK RETENTION Planned versus Unplanned Retention Funded versus Unfunded Retention Credit Reserve Funds Self-Insurance Captive Insurers Decisions Regarding Retention Financial Resources Ability to Predict Losses Feasibility of the Retention Program RISK TRANSFER Hold-Harmless Agreements Forms of Hold-Harmless Agreements Enforcement of Hold-Harmless Agreements Incorporation Diversification Hedging Insurance THE VALUE OF RISK MANAGEMENT KEY TERMS AND CONCEPTS Broad form Hedging Risk transfer Captive insurer Hold-harmless agreements Self-insurance Concurrent loss control Indemnity agreements Separation Diversification Intermediate form Severity reduction Domino theory Limited form Speculator Duplication Loss control Transferee Enterprise-wide risk Planned retention Transferor management Post-loss activities Unfunded retention Frequency reduction Pre-loss activities Unplanned retention Funded retention Risk avoidance Hedger Risk retention ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1
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1. Risk avoidance is a conscious decision not to expose oneself or one’s firm to a particular risk of loss. This technique is appropriate when the costs of an activity are small in comparison with the benefits. 2. Frequency reduction involves an attempt to reduce the probability that a loss will occur. For instance, XYZ Corporation could institute a fire safety program designed to educate warehouse employees to be on the alert for fire hazards within the warehouses. Severity reduction involves methods of reducing the magnitude of a loss. XYZ Corporation could install fire extinguishers at various locations within the warehouses in an attempt to ensure that small fires are extinguished before they spread. Separation involves making certain that needed goods are not all stored in the same location so that all of the goods will not be destroyed in one occurrence. XYZ Corporation could make certain that needed supplies are not all stored in the same warehouse. 3. Separation involves the reduction of the maximum probable loss associated with a certain risk. A firm may disperse materials in such a way that an explosion or other catastrophe will not damage more than a limited amount of materials. Duplication might be used instead if there is an extreme need to have a certain piece of machinery around continuously, such as extra computers at another location. 4. Some categories are (1) repair or replacement of damaged property, (2) income losses due to destruction of property, (3) extra costs to maintain operations following a loss, (4) adverse liability judgments, (5) medical costs to treat injuries, and (6) income losses due to deaths or disabilities.
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IMch05 - CHAPTER 5 Risk Management Techniques Noninsurance...

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