CHAPTER 8 – Selecting and Implementing Risk Management Technique

SUMMARY

 This chapter discusses the steps for selecting among the available risk management technique
for a given situation. It can summarize as follows:

1. Avoid risks if possible

2. Implement appropriate loss control measures
3. Select the optimal mix of risk retention and risk transfer

 Because of the dynamic nature of risks and the techniques for managing them, risk management
decisions must be reviewed regularly

 Present Value analysis can be useful in deciding how much money to spend on loss control. If
the Net Present Value of the cash flows is positive, expenditures are justified.

 “High” versus “low” loss frequency and severity classifications are useful in deciding on an
appropriate mix of risk retention and risk transfer. Risk retention tends to be optimal when
expected severity is low, especially if expected frequency is high.

 Risk Transfer is appropriate when expected frequency is low but there is high potential severity.
If losses have both high expected frequency and severity, a variety of risk transfer, risk
retention, risk avoidance, and loss control may be necessary.

 Both Capital Budgeting and statistical analysis can be used to select the best mix of risk
retention and risk transfer. This mix may be accomplished through the selection of a deductible
and/or the establishment of a self-insurance fund.

 Self-insurance may provide some financial advantages to a firm because interest can be earned
on funds that are not currently needed to pay for losses.

 Businesses considering self-insurance should analyze their ability to predict probable losses,
maintain accurate loss records, administer the many details of the arrangement, and deal with
large and unusual losses.

 Risk Managers in businesses must learn how to work with a variety of persons, both inside and
outside of their firms, in implementing appropriate risk management decisions.

 In addition to avoidance, control retention, and transfer, two methods for reducing subjective
risk are obtaining more information and group discussion.

 Enterprise risk management is changing the way firms approach the management of risk. The
integration of risk management strategies across all categories of risk facing the firm is causing
firms to utilize alternative risk transfer tools, such as blended risk contracts, multiple-trigger
insurance policies, and securitization of risk.