Rsk4803 exam pack 2026
WHAT IS RISK RETENTION - -- 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 - -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 - -- 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? - -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? - -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? - -- 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) - -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:
- the analysis of the org. historic loss iot determine loss distribution pattern;
- loss distribution patterns are used to predict the firms future cost of loss. losses with a high
frequency and low severity are usually suitable for retention.
WHAT IS RISK RETENTION - -- 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 - -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 - -- 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? - -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? - -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? - -- 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) - -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:
- the analysis of the org. historic loss iot determine loss distribution pattern;
- loss distribution patterns are used to predict the firms future cost of loss. losses with a high
frequency and low severity are usually suitable for retention.
