TEMPLE RMI 2101 - Topic 6— “Risk Management Techniques: Loss Financing”

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Topic 6— “Risk Management Techniques: Loss Financing”Risk Management Alternatives- Avoidance, loss control, loss reduction, separate exposure units, duplicate exposure units.Financing Options- Sources of funds to pay for losseso External or Internal- Risk Transfers of Finance Typeo Still have asset (still exposed to loss)o Transferring financial responsibility for the loss Insurance— (Big)- 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 Agreemento Engaged contractor—financially responsible for any losses contractor will accept the loss risk for you/firm. But contractor will not assume responsibility/liability foryour negligence.- Hold Harmless / Waivers / Releaseso “Assumption of Risk”  Skydiving, bungee jumping Lease - Tennant financially responsible for all losses that occur to property that is in his/her Care / Custody / Control  The 3 C’s (CCC)_____________________________________________________________1. Retention-- “Retain Exposure”a. Firm / individual assumes responsibility for lossb. EXAMPLES:i. Not buy insuranceii. Under insureiii. Insurance policy with deductible c. Deductible= Active Retentioni. Actively and deliberately chose to retain at least part of loss—General liability of property and auto.2. Passive Retention a. May not be aware of deductible b. Failed to properly identify the loss orc. Flat out underestimated3. Funded Retention a. Putting funds away every period—monthly / yearly / quarterlyi. Money in reserve for lossesii. Very intentional—budget & plan4. Unfunded Retention  Choicea. Putting no money aside—pay out of pocketi. May have to borrow money if you don’t have itb. If there is a loss, there is low severity—low costc. 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 losseso Large deductible/ self insurance retention funding most losses- Very well planned strategyo Large group neededo Health Insurance—need 50% of employee participationo ER Benefit plan—dental, visual, prescriptionso Workers comp—largest number of employees Wages and medical benefits - Ideal Characteristics for Self Insurance:o Large Number of participantso Fairly predictable losseso Long pay out period- Advantages of Self Insuranceo No premiums; No Losses  you keep the moneyo No Risk Charge / or outsider administration costs Commission and state fee  10%-30%o Personalized product- Disadvantages of Self Insuranceo Catastrophic loss—could ruin companyo Commercial product  you know what premium will be With a good year—rates may get better- “Stop Loss Policy”—Policy of Last Resorto 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 techniqueso Incentives—smoking cessation, gym o Cash bonus to opt out—but employee must have coverageo 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/ recordso Settle claimso Return to worko Wellness program- Buy “Administration Services Only” (ASO Contract)o 3rd party administrator = TPAo Reputable – backing you upo Face/Name – not necessarily employerso Fee $o Tax Perspective Cost of premiums is tax deductible  Self Insure—Pay Taxeso 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 companyo Parent= 1 company or many together Single Parent—1 firm funds everything  Association Parent—Group funds- Advantages: o Helps pricing in a hard marketo Offshore captive—Bermuda, Cayman Islands, Canada Reason: Tax Benefits Very Stable governmentso Parent Company essentially paying premiums to Captive Insurance companies Self Funded Retention / Reserveo Risks of Parent are the only Risk covered by captive- Big Problem:o Cant conduct business on

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TEMPLE RMI 2101 - Topic 6— “Risk Management Techniques: Loss Financing”

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