Traditionally risk management has taken a

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relationships between the various risk exposures? Traditionally, risk management has taken a disaggregated approach but there are many arguments suggesting that an aggregated focus is more effective. A disaggregated approach can increase transaction costs since there are fixed costs associated with this process; using a single contract that covers multiple sources of risk can reduce these fixed costs. Bundled Policy – a policy that bundles multiple exposures - once a firm’s aggregate retention level was reached, any additional loss would be covered, reducing the insured’s incentive to control additional losses once the retention level was reached; to mitigate this moral hazard problem, per occurrence deductibles for each type of loss exposure would likely be included in any bundled policy - a disadvantage is that the parties need to have an understanding of all of the risk exposures and their correlations; transaction costs of doing analysis may rise relative to those for separate contracts Conclusion Several of the reasons for reducing risk imply that a firm should focus its risk reduction activities on an aggregate financial variable, such as earnings, cash flow, or taxable income. The risk of an aggregate financial variable can be reduced either by focusing risk reduction activities on the aggregate variable or by focusing on the risk of each individual component of the aggregate financial variable.
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