Actions that reduce the expected cost of losses by

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Actions that reduce the expected cost of losses by reducing the frequency of losses and/or the severity (size) of losses that occur are known as loss control . Actions that primarily affect the frequency of losses are commonly called loss prevention methods. Actions that primarily influence the severity of losses that do occur are often called loss reduction methods. There are two general approaches to loss control: a) reducing the level of risky activity b) increasing precautions against loss for activities that are undertaken Risk Avoidance – completely eliminating exposure to losses by reducing the level of activity to zero (2) Risk Financing refers to decisions about how to pay for losses if they occur. Methods used to obtain funds to pay for or offset losses that occur are known as loss financing . There are four broad methods of financing losses a) retention – business or individual retains the obligation to pay for part or all of the losses b) insurance – the purchase of insurance contracts requiring insurer to provide funds to pay for losses c) hedging – forwards, futures, options and swaps are used extensively to manage various types of risk d) other contractual risk transfers – contracts that allow business to transfer risk to another party
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