Assignment
Chapter 3
Please remember that you must do your own work. Any plagiarism will result in a grade of zero for all students involved. Please use your own words even if you are using the textbook for answers. Always provide a citation when a reference is used.
1. a. What is the definition AND purpose of Risk Management?
Risk managementis defined as a systematic process for the identification and evaluation of pure loss exposures faced by an organization or individual and for the selection and administration of the most appropriate technique for treating such exposures.
b. Explain the steps in the risk management process. Which step is the most important?
There are four steps in the risk management process: (1) identify major and minor loss exposures; (2) measure and analyze the loss exposures in terms of loss frequency and loss severity; (3) select the appropriate technique or combination of techniques for treating each loss exposure; and (4) implement and monitor the program.
2. You have just opened a children's day care that can care for up to 100 children per day. You are concerned about liability exposures as well as earning enough revenue to be profitable. For each of the following risk management techniques, describe a specific action using that technique that may be helpful in dealing with the day care's liability exposure. Be specific.
a. Avoidance:
b. Loss prevention
c. Loss reduction
d. Duplication
e. Separation
f. Diversification
g. Non Insurance Transfer
3. a. Describe the reasons a company may establish a captive insurer?
A captive insurer is an insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposures.
b. Explain the advantages of using a captive insurer in a risk management program.
Captive insurers have several advantages:
• The parent firm may have difficulty in obtaining certain types of insurance from commercial insurers, so a captive insurer can be formed to provide coverage.
• Insurance costs may be lower because of lower operating expenses, avoidance of an agent's or broker's commission, and retention of interest earned on invested premiums and reserves that commercial insurers would otherwise receive.
• A captive insurer provides easier access to a reinsurer.
• A captive insurer can be a profit center if the captive insures the public and other parties as well.
c. Provide a real-life example of a large captive (include citation). I don't know the answer..
4. Avoidance is a risk-control technique that can be used effectively in a risk management program.
a. What is the major advantage of using the technique of avoidance in a risk management program?
The major advantage of avoidance is that the chance of loss is reduced to zero if the loss exposure is never acquired. Also, if an existing loss exposure is abandoned, the chance of loss is reduced or eliminated because the activity or product that could produce a loss has been abandoned.
b. Is it possible or practical for a firm to avoid all potential losses? Explain your answer.
It is not feasible or practical for a firm to avoid all potential losses. Some losses will occur in the normal operations of the firm's business. For example, a paint factory can avoid fire and explosion losses arising from the production of paint by not manufacturing paint. Without paint production, however, the firm will not be in business.