RISK MANINSURANCE RMIN 4000
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This 16 page Class Notes was uploaded by Dr. Ashtyn Nitzsche on Saturday September 12, 2015. The Class Notes belongs to RMIN 4000 at University of Georgia taught by Berry-Stoelz in Fall. Since its upload, it has received 35 views. For similar materials see /class/201965/rmin-4000-university-of-georgia in Risk Management And Insurance at University of Georgia.
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Date Created: 09/12/15
Exam 3 Notes Section 12 Loss of Life 0 00 o 00 o 00 Managing Personal Risks gt gt gt Financial impact of premature death loss of health disability unemployment retirement Taking perspective of survivors those dependent ton you premature death only exists for dependents Life insurance is basically for people with a family Premature death gt gt Funeral costs loss of income stream for dependents Mortality table male life expectancy is lower I Men pay higher premiums for life insurance women pay more for annuitiespension premiums since they live longer Approaches to the amount of life insurance one should own V V Human life approach I Calculate present value with current salary Needs approach I Look at how much dependents need to retain their lifestyle how much they spend I Insurance provides gap between what they spend and other sources of income I Dependency period is how long dependents are dependent on you don t need the insurance once second income can pay for all needs out of school grow up I Adv more accurately reflects situation of dependents I Disadv lengthy process based on a lot of assumptions Premature death 3 legged stool gt gt V V Diversify don t put all your eggs in one basket Gov t I Kids get pension until they turn 18 I Once spouse reaches retirement age then pension kicks in Employer I Provide basic pension usually I Usually provide access to group life insurance Individualfamily I Save money or purchase standard life insurance I Having 2 income streams also helps to diversify Parties to the life insurance contract gt gt gt V Insurable interest need to suffer a financial loss if person passes away Face amount of insurance is paid out if person passes away Beneficiary can name anyone and can change whenever you want I Irrevocable beneficiaries can only be changed with written consent of beneficiary Secondarycontingent beneficiary money goes to them if primary beneficiary dies 39239 Term insurance two types of insurance are term and whole gt For specific term and after that it expires but it is renewable I Max is up to retirement V Pure risk contract gt Temporary protection gt Renewable at end of amount oftime term can renew I Value insurance company can t turn you down if you get sick premium still only goes up with population average rather than your individual average gt Convertible can convert to whole life policy if you want life insurance beyond retirement age 6570 gt Limitations it ends at some point gt Adv cheaper premium is much lower best for people with dependents v Whole life insurance gt Permanent insurance fixed premium gt Cash value of policy will get savings part back if you cancel policy gt Flexible product only good product if you stick with it until the end gt Two types of policies I Ordinary whole life I Limited payment life insurance limited pay life single premium life 0 0 Variable life insurance gt Similarities to whole life permanent insurance fixed premium gt Differences to whole life investment options face values uncertain cash values uncertain 0 0 39 Universal life insurance gt Offers more flexible premium payment options than do most other forms of life insurance gt The minimum initial premium require to activate the policy is specified by the insurer but the policy owner usually decides the timing and size of subsequent premiums gt Policy owners can periodically adjust the size of the death benefit in most universal life contracts although insurers may require proof of insurability if a request is made to increase the death benefit gt Type A universal life I Not common payout is exactly the face amount no matter what I Death benefit is the cash value plus whatever amount is necessary to bring the total to the specified amount gt Type B I Really only see this type paying more I Has fluctuating death benefits that are made up of a specified amount of death protection plus the policy s cash value I As the cash value grows over time so does the death benefit 39239 Credit life gt Close to term life policy with a decreasing benefit gt Usually not a lot of underwriting involved gt Not a great deal better to get standard life insurance policy with standard loans gt Offered in connection with installment sales of consumer durables such as automobiles gt Will expire when installment sales contract is paid off gt Cost of protection is incorporated into the regular payment made by the purchaser 39239 Endowment life policy gt Like term life insurance with savings component pays out no matter what gt Savings I 39 39 39 gt Hardly sold today 0 I Section 9 Propertv and liabilitv loss exposure Property Loss Exposures 39239 Not all types of property are insurable gt Coverage cannot be purchased for loss of goodwill or loss of a copyright I Hard to develop similar risk pool but the bigger issue is measurement 0 How do you price the policy gt Raw land is difficult to insure I Market supply and demand drives the value of the land I This is determined by how many people are interested in living there Catastrophic events can impact the value so it is hard to insure Liability Exposures 39239 One of the most serious financial risks that risk managers must deal with gt Loss thorough legal liability for harm caused to others 39239 Insurance for liability losses is more complex than property insurance gt Because people other than the insured and the insurer are involved 39239 Liability is usually determined by proving negligence gt See if the person caused the accident negligently gt Negligence carelessness the courts compare the level of care to a bench mark I A certain level of care is expected I Negligence means that you fail to provide that set certain level of care 39239 This is a bigger liability risk that property gt Liabilities are determined by the legal environmentcourt gt This makes liability exposures more complex because the environment changes overtime I In differentjurisdiction courts rule differently I There is an uncertainty of outcome Types of Liability Damages 39239 Insurance contracts are designed to pay only for certain types of losses gt Usually restricted to pay for I Bodily injury I Property damage I Personal injury I Legal expenses 39239 Defendant The one who causes the accident o o o o 39 Plaintiff the one who sues 39 Bodily injury gt Includes liability for losses a person may incur because his or her body or mind has been harmed I Includes payments for medical bills loss of income rehabilitation costs loss of services pain and suffering damages and punitive damages Medical bills and loss of income are economic losses you can easily attach a monetary value Includes indirect losses caused by injuries Pain and suffering are noneconomic losses they usually more expensive because when people sue it s for big money Punitive damages are used to punish O These are usually only applied to corporate cases Courts make an example of the company They add additional costs in hopes that the company will change its behavior and not make the same bad decision again gt GOAL prevent every company from making the same decision again NPV analysis v Property Damage gt Loss may be due to an actual damage to the property as well as loss of use of the property v Personal Injury gt Result from libel written slander spoken invasion of privacy false arrest etc v Legal Expenses gt Defense the insurance policy covers legal expenses related to the defense Punitive Damage Example NPV 100000000 10000000 A company has a faulty design I their car but the company does a net present value analysis and sees that it would be cheaper to accept the deaths in the cars than recall the parts to fix them So the courts add punitive damages to make an example of the company In addition they bring the net present value to 0 which will change future decisions If NPV was 0 or positive the company would have recalled parts and saved lives 39239 Negligence There is a certain level of care and if you do not meet that you are negligent and liable Civil Law Tort Law Criminal Law Contract Law gt Contract Law Only deals with breach of contracts If someone violates that you can file a suit gt Tort law includes slander libel assault and negligence I Slander libel and assault are intentional Criminal and Civil Law 39239 Criminal Law gt Directed toward wrongs against society I Examples include murder robbery rape assault with a deadly weapon 39239 Civil Law gt Directed toward wrongs against individuals and organizations I include institutions and corporations I Examples include breach of contract and negligent acts m 39239 llEverything else 39239 Legal injury or wrong to another that arises that of actions other than breach of contract gt Courts will provide a remedy by allowing recovery in an action for damages 39239 Legal injury gt Results when a person s rights are wrongfully invaded I Right of personal privacy right to enjoy one s property and right to be free from personal injury Basic Law of NegligenceThe Negligent Act 39239 Negligence is the failure to exercise the degree of care required by law fail to provide the required level of care gt Conduct that a reasonably prudent individual would exercise to prevent harm 39239 A negative act gt Failure to do something not signaling when turning I Negligence maybe the failure to act when there is a duty to act 39239 A positive act gt The doing of something gt Example You hit the car in front of you when car stops Negligent Act 39239 A voluntary act gt One that is done voluntarily I An involuntary act is excusable gt A negligent act is not excused because there is no intention to harm 39239 An imputed act gt One is liable not only for one s own actions but also for the negligent acts of service or agents acting in the curse of their employment or agency I Employers may be sued because of negligence acts of their employees 0 Vicarious liability gt Example Janitor mops the floor and someone slips The company is liable not the janitor gt The company is always liable for the individual acts of their employees which is why you should fire someone if they are negligent 39239 Proximate cause of the loss gt There must be an unbroken chain of events leading from the negligent act to the damage sustained Defenses against Negligent Claims 39239 Contributory Negligence If both parties are to blame in a given accident gt May not collect against the other even if the defendant was 90 percent to blame and the plaintive only 10 percent to blame gt 1st defense is saying the other person is at fault too if defendant is even a little bit guilty they get M money from plaintiff gt llThe other person also made a mistake so I should not be completely liable I Example You didn t turn on but I did not stop at the stop sign 39239 Assumed Risk gt Defendant may raise the defense that the plaintiff has no cause for action because the plaintiff assumed the risk of harm from I The conduct of the defendant I The condition of the premises I The defendant s product gt Example Going to a baseball game you cannot sue when you get hit by a baseball because you assume the residual risk when you attend a game 39239 GuestHost Status gt Relate to the standard of care by an automobile driver to a passenger gt Laws that restrict passengers to sue drivers assume risk by deciding to ride with person I Can only hold drivers liable if they act gross negligently EXAMPLE negligence Loss 30000 car B has the loss A is at fault 90 B is at fault 10 Contributory negligence law how much does B get from A 0 Comparative negligence law B collects 27000 from A 90 Last Clear Chance rule A had last clear chance to avoid accident completely so it doesn t matter if B was at fault B collects 30000 Factors Leading to Higher Standards of Care 39239 Expanding application of liability gt Courts tend increasingly to impose liability in a new factual setting 39239 Weakening of defense against a liability gt Most states have enacted a statute that replaces the defense of contributory negligence with comparative negligence I The liability of the defendant is reduced by the extent to which the plaintiff was contributively negligent gt Last clear chance rule I A plaintive who was contributively negligent may still have a cause of action against the defendant o If it can be shown that the defendant had a last clear chance before the accident to avoid injuring the plaintiff but failed to do so 39239 Trend to increase liability risk expense for corporations 39239 Courts expect increases in the standard of care today 39239 Res spa Loquitur llThe thing speaks for itself gt Plaintiff may sometimes collect without actually proving negligence on the part of the defendant 1 The defendant is in a position to know the cause of the accident the plaintiff doesn t understand the details 2 The defendant had exclusive control of the instrumentality that caused the accident 3 The use of the instrumentality would not normally cause injuries without the existence of negligence This is applied in medical malpractice suits when the plane crashes There is an increase in the number of medical malpractice lawsuits because there is an increased likelihood of winning a case This increases the liability of practitioner which increases the cost of medical services Tradeoff Do you want to keep costs down or protect everybody VV V o v Expansion of imputed liability gt Joint and several liability I When an accident occurs and several different parties are negligent o The plaintiff may sue and collect from one or more of the negligent parties 0 as soon as multiple companies are at fault you can pick who you want to sue usually big company gets sued first but all are jointly liable Example 2 companies build a building they split the work There is a major accident and bystanders are injured who is liable 0 Whenever multiple companies are at fault to some degree you can choose who you want to sue Big companies always get sued first O Increased liability expense for big companies Superfund legislation I Created by the Federal government to help fund the cleanup cost of major pollution sites EPA 0 Estimated that more than 80 percent of the funds spent on the Superfund enforcement is for overhead legal fees etc and less than 20 percent for cleaning up the environment I Whoever owns the property now is responsible I There are questions of effectiveness of this system Larger corporations have to be very careful when they are choosing business partners 0 Example Sears was talking to new small company about being the point of sale for an energy efficient car This company had no liability record so Sears cut the project because the liability exposure was too big V Factors Leading to Higher Standards of Care 39239 Changing concepts of damage gt More liberal interpretation of what types of damages may be allowed in negligence actions I Damages have been awarded for such things as mental anguish gt Every state allows punitive damages except Massachusetts Nebraska and Washington I Awards used to punish defendants because their actions constituted gross negligence or willful and wanton misconduct Increased damage awards The effect of inflation in reducing the purchasing power of the dollar has undoubtedly contributed to the increased amounts of damage awards Perhaps the existence of liability insurance has caused juries to be more generous I Than they would be if they knew the plaintiff would pay the damages personally gt The insurance industry is supporting various types of tort reform including I Imposing restrictions on the right to sue I Abolishing punitive damages in civil suits I Reducing the standard of care to the standard existing all the time the product was made instead of at a time the loss occurred I Placing a ceiling on noneconomic damages I Repealing the collateral source 0 00 V Liability Claims 39239 Liability exposures are important for corporations much more dynamic than property risks a lot pricier 39239 We add warning labels to try to protect from certain exposures Section 10 Risk Management for Auto Owners 39239 Eligibility for the PAP personal auto policy 0 o 00 gt gt gt gt gt gt Car owned or leased by an individual or jointly by a married couple Private passenger car used for pleasure of business Pickup truck or van used in farming of transportation of goods Not for corps commercial auto policies Also used for standard cars when using certain kinds of business activities everything but auto related business activities taxis excluded Your covered auto I Small passenger auto pickup or van not big truck standard car I Newly acquired autos just driven off lot have 4 days to add physical damage coverage to your car 14 days if you already have coverage to notify insurance company of purchasing new car I Trailer I Replacement vehicles rental car while car is getting fixed The Personal Auto Policy PAP gt gt gt gt gt gt Part A liability pays if you are sued minimum you need required by law Part B medical payments pays you ifinjured optional Part C uninsured motorists pays if you are hit optional Part D physical damage pays for damage to your car optional I Collision most expensive part of policy I Other than collision Part E duties after loss Part F general provisions Part A liability coverage gt gt V V Pays legal judgments bodily injuries includes pain and suffering and physical damage on your behalf resulting from an auto accident Coverage on the car is primary not excess policy on car pays coverage first primary only if limits aren t high enough will driver s policy also come into play to pay excess up to your policy limits Single vs split limits of liability I Ex 100K vs 10030050 BI claims of any one persontotal BI claims from accidenttotal PD losses caused by one accident Injured persons I Any person using your covered auto driving with permission spouse family members I Any org whose liability arises from your negligence with auto delivering pizza and getting in accident ins Co still covers pizza co o 00 V Exclusions I Intentional injury I Damage to own property I Damage caused while using your car as a taxi separate taxi policy I Using vehicles without permission stolen car I Damage caused ifa driver in auto business is using car I Damage caused while using a motorcycle I Other vehicles not listed in declarations needs to be specifically stated in declaration gt Other conditions I Out of state coverage and out of country coverage US and Canada Part B medical payments coverage gt Caused by an accident and sustained by an insured on a no fault basis friend borrowing car gt Insured persons I You are covered if struck by car as pedestrian can still use if your fault I Includes occupants of car but not those you hit gt Conditions I Policy limits are on a per person basis I Exclusions are similar to part A Part C uninsured motorists coverage gt Pays BI and PD ins some states damages an insured is legally entitled to recover from negligent driver who classifies as UM UM has to be at fault doesn t count if you cause accident V Uninsured motor vehicle means I No policy applies at time of accident or inadequate limits no insurance at all or don t meet minimum limit requirements I Hit and run vehicle need police report to file claim iftotal damages are below 500 don t need to call police if someone is injured need to call police I Tort feasor insured by insolvent insurer I Tort feasor violates conditions of their contract gt Exclusions close family members are excluded under UM if brother doesn t have insurance not covered if accident with family member Part D physical damage to autos gt Pays for direct accidental losses to cover auto or non owned auto other cars of non moving objects just hitting something I Collision I Other than collision broken window tree smashes car flooding aka comprehensive coverage 1 Hitting deer on road or any animal a Random event not related to your driving behavior ins co can t change your premium because of it 2 Glass breakage a Separate claim if not from collision accident insurance company lets you pick whether it s collision or non collision claim deductible usually higher for collision claims than non collision claims gt Exclusions normal wear and tear only the car and everything permanently attached to car is included when broken intothings stolen gt Transportation and towing pay some for towing gt Other provisions actual cash value vs total replacement cost vs total I Actual cash value what you get needs to be similar to your car I Replacement cost same quality car brand new today 39239 Other parts of policy gt Part E duties after an accidentloss I Promptly notify insurer how when and where they don t have to pay if you wait too long I Cooperate with insurer in process I UM claim promptly notify police gt Part F general provisions I Territorial limits US and Canada I Policy cancellation can cancel anytime ins co will repay you for what you ve paid in advance 0 ns co can only cancel if you don t pay or if your license gets suspended usually 6 month contract I Endorsements o Underinsured motorists has insurance but claim is much higher than their limit pay difference 0 Motorcycles snowmobiles 0 gap insurance difference between what the car is worth and what you owe on the car comes into play if car is stolen or totaled 39239 Cost of auto ins gt Primary factors I Territory where you livedrive big rating factor I Age gender marital status use of auto cannot use race 0 Men on avg have higher accident rates 0 Married people have lower accident average 0 Pay higher rate using car for business vs driving downtown vs for farming gt Secondary factors I Vehicle type driving record number of vehicles insured 0 Can move up or down depending on how many accidents you have moreless discounts badgood risk Section 11 Risk management for auto owners II o 00 o 00 No Fault gt No person would be held liable for an accident the tort system would be eliminated gt Each person s auto insurance would pay for damage to his or her car and for injuries to the insured and his or her family while riding in car V No litigation would be necessary about fault because the insurance policy would pay without regard to fault V Everyone gets coverage based on personal preferences gt Incentives to drive carefully because your rate can still be affected if it s not your fault gt Not opportunity would exist to sue and collect for noneconomic losses such as pain and suffering not measurablequantitative so can t insure it Modified no fault gt No pure fault plants are in operation in the US because many Americans don t want to vie up their right to bring a tort action gt Can t sue unless your medical bills exceed a certain threshold still can t collect for pain and suffering if under limit amount Add on states gt Injured parties can collect from their own insurers gt However no restrictions are placed on the ability to sue can sue other party and collect from ins co first for every ins policy in that particular state gt The first party benefits are purely an add on with nothing being taken away in exchange I Additional rights and benefits premiums to up rates go up Choice no fault gt 3 states have this system Kentucky NJ and Penn gt People can choose to pay lower premiums to purchase no fault coverage the restricts the right to sue I Can purchase no fault give up right to sue collect from ins co premium discount gt OR they can pay higher premiums to retain their ability to sue I Std policy can sue collect from negligent driver Section 13 health and loss of income risks 0 00 o 00 Financial impact of disability gt Lost income due to tie away from work gt Length of disability I Temporary disability vs permanent disability I Total disability can t work at all vs partial disability can work a few hours a week Health exposures 3 legged stool gt Employer I Health insurance I Disability insurance offered but you pay full amount 0 o 00 gt Gov t I Health and disability ins medicare Medicaid for low income people gt ndivfamily I Health and disability insurance Health insurance plans gt Fee for service plans standard set up get sick go to hospital bill ins co pays gt Managed care cutting out unnecessary fees bulk discounts focus on prevention I HMO health maintenance org need to name primary physician for whenever you have an issue go to that physician first to tell you what to do go to hospital if they can t help you cuts unnecessary careduplicate exams I PPO preferred provider organizations like POS without primary care physician requirement more relaxed than POS or HMO I POS point of service plans open ended HMO can be organized in all the same ways as an HMO have more freedom of choice in selecting doctors and other medical care providers I PSO same as HMO run by medical providers hospital Disability insurance gt Long term pay up to retirement age gt Short term gt Occupational worker s comp if something happens on the job you are covered gt Non occupational disability if you are not on the job this pays helps avoid double collecting gt Waiting periods I Benefits do not happen on the first day I With long term contracts you may have to wait up to a year I This avoids minor claims and cuts down on cost I Similar to a deductible I Provides incentives for people to go back to work gt Can purchase up to 80 of your income because you do not want people gaining from disability Financial impact of unemployment and retirement gt Unemployment I What happens to income I Moral hazard problems I Insurance cos do not like to provide unemployment insurance because 0 Cannot pool the risk 9 Someone losing their job may be because they are a bad worker 9 Not a random event 0 Systematic risk is too high 9 A lot of companies may fire many people at one time Risk Management and Insurance Exam 1 Section 1 objectives 1 Explain three ways to categorize risk Pure vs speculative risk Subjective vs objective risk Peril vs hazard vs exposure List the components of an entity s cost of risk The sum of Outlays to reduce risks Opportunity cost of activities forgone due to risk considerations Expenses of strategies to finance potential losses The cost of unreimbursed losses Give several examples of risks involving property liability life health loss of income and financial losses Property lightning tornadoes hurricanes explosions falling objects floods Liability payments made to compensate injured parties as well as punish those responsible for injuries all individuals who own or use real property are liable for others injured on premises Personal life and health and loss income risks untimely death ill or injured employees insufficient income for retirement unemployment potential death of parent with young children Financial include credit risk foreign exchange risk commodity risk and interest rate risk these risks must be identified and assessed in order for the firms to achieve its business goals Distinguish between probability of loss severity of loss and objective risk Probability of loss chance of loss the long term chance of occurrence or relative frequency of loss meaningful only when applied to the chance of loss occurring among a large number of possible events Severity of loss how bad the loss is the severity of it Objective risk measures both dimensions probability of loss and severity of loss simultaneously probably variation of actual from expected losses Give examples ofthree types of hazards Physical a condition stemming from the material characteristics of an object exposed wire icy street Moral stems from an individual s mental attitude dishonesty associated with intentional actions designed either r to cause a loss or to increase its severity 0 N 9 Morale the mental attitude of a careless or accident prone person leave keys in unlocked car leave house unlocked Identify the difference between hazards and perils Peril specific contingency that may cause a loss hurricane fire Hazard conditions that exist which either increase the probability of a loss for a particular peril or tend to make the loss more severe once the peril has occurred exposed wires Explain the evolving concept of integrated risk management Intent to manage all forms of risk regardless oftype combines coverage for pure and speculative risks in the same insurance contract 0 Some firms have created risk management committees or position of chief risk officer to coordinate the firm s risk management activities 0 Combining responsibilities in one area permits treatment of the risks in a unified and often more economical way Explain the four steps in the risk management process Identify risk Evaluate risk Select risk management techniques Implement and review decisions Section 2 objectives l quot Explain several methods for identifying risks Loss exposure checklist specifies numerous potential sources of loss from the destruction of assets and from legal liability Financial statement analysis all items on a firm s balance sheet and income statement are analyzed in regard to risks that may be present Flow charts allow risk managers to pinpoint areas of potential losses Contract analysis some contracts state that some losses if they occur are to be borne by specific parties On site inspections look for risks during visits talk with department managers and other employees regarding their activities are people following the rules Statistical analysis of past losses use a RM information system software to assist in performing this task Identify the important elements in risk evaluation Estimate both the frequency and severity of potential losses 0 Common to use probability distributions and statistical techniques in estimating loss frequency and severity Identify maximum probable loss and maximum possible loss S P Uquot Section 5 Explain three different measures of variation Variance and standard deviation measures how close a group of individual measurements is to its expected value or mean 0 Sqrtprobability x mean expected value2 Coefficient of variation standard deviation expressed as a percentage ofthe mean 0 Standard deviationexpected value Explain three different measure of central tendency Mean sum ofa set ofn measurements divided by n Median midpoint in a range of measurements Expected value weighted average weighted by the probability a measure of the center of distribution 0 Probability x loss amount Explain the importance of the law of large numbers for risk management As the number of homogeneous exposure units increases the degree of risk decreases Given a constant number of exposure units as the probability of loss increases the degree of risk decreases Definition the greater the number of exposures the more closely will actual results approach the probably results expected from an infinite number of exposures 3 Objectives Give examples ofthe use of risk avoidance and explain when it is an appropriate risk management technique Conscious decision not to expose oneself or one s firm to a particular risk A doctor may decide to leave the practice of medicine rather than contend with the risk of malpractice liability losses Common among those with a strong aversion to risk Differentiate between frequency reduction and severity reduction and give examples of each Frequency reduction using loss control measures to reduce loss frequency such as injuries to workers Severity reduction an auto manufacturer having airbags installed in the company fleet of automobiles to reduce the probable injuries or make them less severe Explain three different forms of loss control differentiated on the basis of timing issues and provide examples of each Severity reduction Separation reducing the max probably loss by spreading out the risk 5 small buildings vs 1 large one P Uquot 9 Duplication spare parts or supplies to replace immediately damaged equipment avoid business interruption exposure List several potential costs and benefits associated with loss control measures Benefits reduceelimination of repair or replacement of damaged property income losses due to destruction of property extra costs to maintain operations following a loss Costs installation and maintenance expenses sprinkler system List four forms of funded risk retention Credit may provide some limited opportunities to fund losses that result from retained risks but usually not a viable source of funds for the payment of large losses Reserve funds est to pay for losses arising out of risks a firm has decided to retain Self insurance the est of a fund to pay for those losses need existence of a group of exposure units that is sufficiently large to enable accurate loss prediction prefunding of expected losses through a fund specifically designed for that purpose 0 with a large risk pool objective risk decreases because losses are predictable for an overall pool captive insurers combines risk retention and transfer like self insurance but you can create a separate subsidiary have a separate insurance entity to insure risk exposures in a company Describe the nature of risk transfer as a risk management tool and list five forms of risk transfer invoves payment by one party to another transferee agrees to assume a risk that the transferor desires to escape Hold harmless agreements provisions inserted into many different kinds of contracts can transfer responsibility for some types of losses to a party different than the one that would otherwise bear it intent is to specify the party that will be responsible for paying various losses and usually no dollar limit is stated Incorporation the most that an incorporated firm can ever lose is the total amount of its assets personal assets of the owners cannot be attached to help pay for business losses unless a sole proprietorship risk of the firm having insufficient assets to pay business debts is shifted to the creditors Diversification results in the transfer of risk across business units combining businesses or geographic locations in one firm can even result in a reduction in total risk umbrella and sun lotion company Hedging involves the transfer ofa speculative risk a business transaction in which the risk of price fluctuations is transferred to a 3rd party Insurance most widely used form
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