Assignment
Please remember that you must do your own work. Please use your own words even if you are using the textbook for answers. Always provide a citation when a reference is used.
1. Explain the steps in the risk management process. Which step is the most important?
Risk management involves two main processes-identifying the loses that a firm is exposed to and choosing the best techniques to counter the exposures. The first step in the process is identifying the possible loss. The second is measuring and analyzing the loss exposures. Third is coming up with the best combination of measures to counter the loss exposures and the final step is implementing the risk management program and monitoring its progress. The most essential step is identifying the risk exposures. It lays down a foundation for the rest of the process since it determines the course of action that the firm will adopt to minimize its losses.
2. Assuming you own a small restaurant, describe and provide an example of the following risk control techniques you would use.
a. Avoidance: I would encourage cautious behavior among the staff to avoid the undesirable exposure, for example, avoiding selling food on credit to avoid bad debt.
b. Loss prevention: I would take measures to minimize chances of certain risks occurring. For example, installing CCTV cameras to discourage and thus prevent theft.
c. Loss reduction: This technique seeks to minimize the loss suffered incase a certain risk occurs. For example, I would fit several fire extinguishers to reduce the amount of damage caused by a fire.
d. Duplication: This a technique that calls for the establishment of a back-up plan. I could create a stand-by IT server in case the main one stopts working.
e. Separation: This is a risk control technique that involvers storing the key aspects in separate locations. In the event of a catastrophic event, it only affects the asset
f. Diversification:The control technique involves investing ones resources in different lines of business to prevent huge losses in the event of poor performance of failure of the business. I would invest in a variety of dishes so that if one line of foods is not performing well, there is a chance that the others are making profits.
3. Answer the following:
a. What is a captive insurer? This is an insurance firm that is fully owned by its own insureds'. They control the company and contribute premiums, which serve to mitigate losses in case the risks they have insured occur.
b. Explain the advantages of using a captive insurer in a risk management program.
One advantage is that the policyholders can come up with covers that meet their needs. They can insure needs that would not be insurable in other insurance firms.
Secondly, captive insurers have increased stability. It avoids fluctuations in the insurance industry.
c. Provide a real-life example of a large captive (include citation).
An example of a captive is the Veritas Insurance Corporation, which is owned by the University of Michigan (Riser Adkisson LLP, n. d).
4. You have just opened a dance school that can teach up to 100 students various forms of dance. 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 school's liability exposure.
a. Avoidance: Offering classes only to students who have cleared the learning fee for the session. This eliminates the possibility of people defying payment.
b. Loss prevention: Employing security guards to patrol the premises. This will prevent thieves or possible attacks.
c. Loss reduction: Installing firefighting equipment to minimize the amount of loss suffered in case of a fire.
d. Noninsurance transfers: I would subcontract with another dancer to offer the classes in order to share any possible risks between us.
e. Transfer: Taking up a policy with an insurance company for exposure to fire.
5. 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? Avoidance eliminates the possibility of occurrence of certain risks. Thus, one does not have to worry about how to deal with them.
b. Is it possible or practical for a firm to avoid all potential losses? Explain your answer. I do not think it is practical for a company to avoid all risks as it is only applicable to few hazards, since they have little control over some events. For example, it is not possible to avoid a fire breakout in a restaurant, as they need to use cookers, which pose a risk.
References
Riser Adkisson LLP (n. d). Captive Insurance. Retrieved from