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Chapter 5: Risk Treatment Techniques

Risk Avoidance

Risk Retention

Risk Control Risk Transfer

Risk Financing : Insurance

Risk Financing : Non insurance

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Learning Objective

Define and differentiate each risk mgmt

technique

Identify the situations in which the various

techniques can be applied

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RISK TREATMENT

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Risk Avoidance

Risk Matrix

Risk Control----------------

Transfer via

non-insurance

contract

Risk Control

-----------------

Transfer via

insurance

Risk Control via

------------------------

Risk Retention

Severity

highlow RM

Frequency

high

low

100%

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Specialized Risk Control Techniques

Separation of assets

Salvage

Rehabilitation Redundancy

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Risk Control (Financing)

Risk Retention

Risk Transfer

Via insurance

Via contract

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How?

Retain Transfer

7

TRADITIONALNON-TRADITIONAL

Expected lossOpportunity cost

Pure premiumLoading

Adjustment expenses

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Risk Retention

Residual risk treatment techniques

Active risk retention

Aware and decided to retain the risk

Default risk treatment techniques

Passive risk retention

Unaware and assumed risk by default

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Risk Retention Solutions

Funded risk retention

Some assets used as loss reserve

Liquid/semi-liquid

Unfunded risk retention

No specific assets as loss reserve

Will be drawn when the loss occurred.

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Risk Retention Benefits

Advantages / disadvantages

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Risk Transfer via Insurance

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Reduced uncertainty Confirmed the compensation/ benefits

Reduced tax

Other risk management services frominsurance company

Advantages

Expensive premium

Not all are insurable

Less incentive for loss control

Disadvantages

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Risk transfer via contract through

Exclusion

clause

Disclaimer

Indemnity

clause

Hold-

harmlessClause

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Risk Transfer via contract

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Low cost

Risk transferred to experts

Solutions for disputeAdvantages

Ambiguous wordings

Irresponsible third partyDisadvantages

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