RSK 4803: Risk Retention
Study online at https://quizlet.com/_5uigks
1. 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 ettective when:
-on other financing methods available,
-the worst possible loss is not serious and
-losses are highly unpredictable.
2. 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.
3. 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.
4. what are the disadvantages of funded retention?: it might create an
unwarranted com-
pliance and belief that the extent of the loss will be ottset by the fund and
it also has the ettect of reducing the value of the firm once the funds are used toward the loss.
5. 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.
6. why would a firm decide on unfunded risk retention?: - when risk falls
with in the category of high frequency but low severity; or
1/
6
, RSK 4803: Risk Retention
Study online at https://quizlet.com/_5uigks
-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.
7. Analyse the steps to implement a retention
program (10 marks): 1. Determine the feasibility of the
retention fund by:
2/
6
Study online at https://quizlet.com/_5uigks
1. 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 ettective when:
-on other financing methods available,
-the worst possible loss is not serious and
-losses are highly unpredictable.
2. 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.
3. 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.
4. what are the disadvantages of funded retention?: it might create an
unwarranted com-
pliance and belief that the extent of the loss will be ottset by the fund and
it also has the ettect of reducing the value of the firm once the funds are used toward the loss.
5. 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.
6. why would a firm decide on unfunded risk retention?: - when risk falls
with in the category of high frequency but low severity; or
1/
6
, RSK 4803: Risk Retention
Study online at https://quizlet.com/_5uigks
-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.
7. Analyse the steps to implement a retention
program (10 marks): 1. Determine the feasibility of the
retention fund by:
2/
6
