Topic 6 Risk Management Techniques Loss Financing Avoidance loss control loss reduction separate exposure units duplicate exposure units Risk Management Alternatives Financing Options Sources of funds to pay for losses o External or Internal Risk Transfers of Finance Type o Still have asset still exposed to loss o Transferring financial responsibility for the loss Big Insurance Not responsible for asset or activity owner firm is Insurance will step in and pay financial loss Problem if insurance doesn t pay you will Non Insurance Risk Transfer Hold Harmless Agreement o Engaged contractor financially responsible for any losses contractor will accept the loss risk for you firm But contractor will not assume responsibility liability for your negligence Hold Harmless Waivers Releases o Assumption of Risk Skydiving bungee jumping Tennant financially responsible for all losses that occur to property that is in his her Care Custody Control The 3 C s CCC Lease 1 Retention Retain Exposure a Firm individual assumes responsibility for loss b EXAMPLES i Not buy insurance ii Under insure iii Insurance policy with deductible c Deductible Active Retention 2 Passive Retention liability of property and auto a May not be aware of deductible b Failed to properly identify the loss or c Flat out underestimated 3 Funded Retention a Putting funds away every period monthly yearly quarterly i Actively and deliberately chose to retain at least part of loss General i Money in reserve for losses ii Very intentional budget plan 4 Unfunded Retention Choice a Putting no money aside pay out of pocket i May have to borrow money if you don t have it If there is a loss there is low severity low cost b c Low frequency d P 1 200 000 Put aside 100 000 month Losses that are predictable Self Insurance Active Funded Retention Program for firms with many losses and potentially large losses o Large deductible self insurance retention funding most losses Very well planned strategy o Large group needed o Health Insurance need 50 of employee participation o ER Benefit plan dental visual prescriptions o Workers comp largest number of employees Wages and medical benefits Ideal Characteristics for Self Insurance o Large Number of participants o Fairly predictable losses o Long pay out period Advantages of Self Insurance o No premiums No Losses you keep the money o No Risk Charge or outsider administration costs Commission and state fee 10 30 o Personalized product Disadvantages of Self Insurance o Catastrophic loss could ruin company o Commercial product you know what premium will be With a good year rates may get better Stop Loss Policy Policy of Last Resort o Will stop company from losing everything Employer has to submit plans for audit Employer needs to prove its providing what it promised Company not paying premiums maybe use elsewhere Self Insure still retaining benefit of successful loss control and loss reduction techniques o Incentives smoking cessation gym o Cash bonus to opt out but employee must have coverage o Take spouses coverage Firm is Self Insured No risk charge no administrative cost to insurance company Firm increase administration cost when it self insures Employees o Data records o Settle claims o Return to work o Wellness program Buy Administration Services Only ASO Contract o 3rd party administrator TPA o Reputable backing you up o Face Name not necessarily employers o Fee o Tax Perspective Cost of premiums is tax deductible Self Insure Pay Taxes o Tax code is biased against firms that self insure Cost Benefit Analysis Captive Insurance Company Wholly owned subsidiary of company that is NOT an insurance company Primary Purpose Insure risk of parent company o Parent 1 company or many together Single Parent 1 firm funds everything Association Parent Group funds Advantages o Helps pricing in a hard market o Offshore captive Bermuda Cayman Islands Canada Reason Tax Benefits Very Stable governments Self Funded Retention Reserve o Risks of Parent are the only Risk covered by captive Big Problem o Cant conduct business on shore o Parent Company essentially paying premiums to Captive Insurance companies
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