Insurance Risk Management

14 Questions

Which of the following best defines preferred risks?

Risks that are considered great for the insurance company with a lower potential for loss.

Which of the following actions is not part of the risk management process?

Ignoring the measures taken

Risk avoidance involves which of the following?

Eliminating a hazard

Installing smoke alarms is an example of which risk management strategy?

Risk reduction

Which risk treatment method is typically used when losses are highly predictable and not severe?

Risk retention

Buying insurance to manage risk is an example of which method?

Risk transfer

Which of these is an example of risk transfer?

Incorporation

Risk management involves periodic reviews of which of the following?

Measures taken

Which of the following is the best way to transfer risk?

Buying insurance

What does risk sharing typically involve?

Each party assuming a portion of the risk

Which risk management tool involves taking actions to eliminate damage or loss?

Loss prevention

Which of the following is an example of loss prevention?

Constructing buildings with masonry materials

What does risk pooling primarily involve?

Spreading risk by sharing the possibility of loss

How do insurers typically prevent catastrophic loss?

Reinsuring risks

Study Notes

Preferred Risks

Preferred risks are advantageous for insurance companies and have a lower potential for loss, resulting in lower premiums.
These risks are considered desirable for insurance companies.

Risk Management

Risk management is the process of analyzing exposures that create risk and designing programs to handle them.
It involves detecting potential loss exposure, selecting a method to reduce risk, executing a course of action, and reviewing measures taken periodically.

Treatment of Risk / Methods of Handling Risk

Risk can be managed through various strategies, including risk avoidance, risk reduction, risk retention, risk transfer, risk sharing, and risk pooling.

Risk Avoidance

Risk avoidance involves eliminating a hazard to eliminate risk.
Example: avoiding skydiving to eliminate the risk of dying in a skydiving accident.

Risk Reduction

Risk reduction involves minimizing the severity of a potential loss.
Example: installing smoke alarms to reduce the risk of a total loss from a house fire.
Example: quitting smoking to reduce health risks.

Risk Retention

Risk retention involves self-insurance, where an individual or organization retains the risk of loss.
Example: not purchasing an extended warranty on a toaster, retaining the risk of needing to replace it.

Risk Transfer

Risk transfer involves passing risk from one party to another, typically through an insurance contract.
Buying insurance is the best way to transfer risk.
Example: incorporation and hold-harmless clauses.

Risk sharing involves multiple parties assuming a portion of the risk and receiving benefits under the system.
Example: copayment and deductible cost-sharing programs in medical insurance.

Risk Pooling

Risk pooling, also known as loss sharing, spreads risk by sharing the possibility of loss over a large number of people.
Example: insurance companies functioning through pooling of all their insured's risk.

Reinsurance

Reinsurance is the spreading of risk from one insurer to one or more other insurers.
Example: insurers minimizing exposure to substantial loss by reinsuring risks.

Loss Prevention

Loss prevention involves taking actions to eliminate damage or loss.
Example: constructing a building using masonry materials, removing flammable materials, or de-icing an aircraft's wings.
It is a method used to identify and analyze risk and to control losses.