Exam (elaborations)
Exam (elaborations) RSK4803
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RSK4803 EXAM PACK 2024 WHAT IS RISK RETENTION - ANSWER---- Category of risk financing
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RSK4803 EXAM PACK 2024WHAT IS RISK RETENTION - ANSWER---- Category of risk financing;
- when a company intentionally or unintentionally retains the financial consequences of
of a loss for its own account and does not transfer it to a 3rd party;
it is usually effective when:
- on other financing methods available,
- the worst possible loss is not serious and
- losses are highly unpredictable.
what is funded retained risk - ANSWER---when the co. makes provision for losses prior
to their occurrence;
- the funds are prepaid into a fund to finance predicted losses;
- the annual amount required to be retained is determined by assessing the co's historic
loss pattern which reflects an organisation's well-defined loss distribution.
advantages of funded risk retention - ANSWER---- it is a viable alternative for when
there is not market for that particular risk; or
the risk can not be fully transferred through insurance.
- it may also be less expensive than risk transfer in that:
it has reduced transaction costs;
has a faster claim processing ability with no claim disputes;and
also promotes sound risk control program.
what are the disadvantages of funded retention? - ANSWER---it might create an
unwarranted compliance and belief that the extent of the loss will be offset by the fund
and
it also has the effect of reducing the value of the firm once the funds are used toward
the loss.
what is an unfunded risk retention? - ANSWER---It is when losses are funded from the
company;s cash flow and
no formal provision for losses.
- it relates to risk for which there is not insurance and
- risk for which there is insurance but the firm decides not to insure.
why would a firm decide on unfunded risk retention? - ANSWER---- when risk falls with
in the category of high frequency but low severity; or
- the cost of insurance outweighs the benefit of insurance; or
- the loss emanates from an incident for which there is no cover and as a result
insurance is not practical.
Analyse the steps to implement a retention program
(10 marks) - ANSWER---1. Determine the feasibility of the retention fund by:
- determining suitability of the risk financing techniques available for org.;
- classification of risks into insurable and uninsurable, which will reveal the suitability of
funded risk retention;
- evaluate the capacity of org to retain risk and its ability to divert its cash-flow to meet
the losses without significant disruptions.
2. Analysis of the statistical characteristics of the retained risk which involves:
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