Assignment:
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 Management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures" (Rejda, McNamara, 48).
The purpose of risk management is to be aware of the potential problems that may happen.
b. Explain the steps in the risk management process. Which step is the most important?
Risk management has four steps:
• Identify loss exposures: it is basically identifying the major and minor loss exposures. These exposures loss could be property, liability, business income, human resources, crime, employees benefit, foreign, intangible property loss. Also, failure to comply with government laws and regulations is important loss exposures.
• Measure and analyze the loss exposures: it is essential to measure and know the loss exposure to control them in an appropriate way. It depends on an estimation of loss frequency and loss severity.
• Combination of techniques: treating the loss exposures have to have combination of techniques. These techniques are risk control and risk financing. Major risk control could be avoidance, loss prevention, loss reduction, duplication, separation, and diversification. However, risk financing could be retention, noninsurance transfers, and commercial insurance.
• Implement and monitor the risk management program: it is required to have an effective risk management program because it outlines the risk management objective of the firm and a company policy with respect to treatment of the loss exposure.
The most important step is identifying loss exposure because it'll tell you what may happen in the future and the consequences you may face and so on.
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?
There are several reasons that a company may establish:
• The parent firm may have difficulty obtaining certain types of insurance from commercial insurers.
• Some captives are formed offshore to take advantage of a favorable regulatory environment and to avoid undesirable financial solvency regulations.
• Forming a captive may reduce insurance cost 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 insures would receive.
• A captive insurer has easier access to a reinsurer
• A captive insurer can become a source of profit
b. Explain the advantages of using a captive insurer in a risk management program.
c. Provide a real-life example of a large captive (include citation).
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?
b. Is it possible or practical for a firm to avoid all potential losses? Explain your answer.