RSK 4803: Risk Retention Questions and
Answers Latest Edition.
WHAT |IS |RISK |RETENTION |- |ANS |-- |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 |- |ANS |-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 |- |ANS |-- |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? |- |ANS |-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? |- |ANS |-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? |- |ANS |-- |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) |- |ANS |-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.
- |determination |of |the |probability |that |the |fund |will |not |be |sufficient |to |meet |demand |by |determine |the |destruction |probability |of |the |fund.
3. |Evaluation |of |the |appropriate |retention |strategy |in |comparison |with |other |risk |financing |techniques
here |the |org |compares |the |funded |risk |retention |with |other |alternative |risk |financing |techniques |of |insurance
the |total |cost |of |risk |of |the |retention |strategy |is |compared |with |that |of |insurance |with |the |intention |of |determining |the |optimal |trade |off |between |
retained |risk |and |risk |transfer.
4. |lastly |once |decision |has |been |taken |then |the |appropriate |fund |retention |facility |must |be |determined. |the |org |may |create |an |internal |fund |or |create |a |
captive |insurance |company.
Discuss |the |criteria |for |evaluating |the |quantum |of |retention |funding |(10 |marks) |- |ANS |-- |the |effectiveness |of |a |retention |fund |is |affected |by |the |effect |that
|the |fund |has |on |the |value |of |the |firm
- |the |test |is |should |the |funding |have |a |more |positive |effect |on |the |value |of |the |firm |than |other |forms |of |financing, |then |it |must |be |preferred;
1. |value |of |firm:
-Value |of |the |firm |is |the |the |sum |of |the |value |of |the |operations |and |the |value |of |the |investments.
Answers Latest Edition.
WHAT |IS |RISK |RETENTION |- |ANS |-- |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 |- |ANS |-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 |- |ANS |-- |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? |- |ANS |-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? |- |ANS |-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? |- |ANS |-- |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) |- |ANS |-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.
- |determination |of |the |probability |that |the |fund |will |not |be |sufficient |to |meet |demand |by |determine |the |destruction |probability |of |the |fund.
3. |Evaluation |of |the |appropriate |retention |strategy |in |comparison |with |other |risk |financing |techniques
here |the |org |compares |the |funded |risk |retention |with |other |alternative |risk |financing |techniques |of |insurance
the |total |cost |of |risk |of |the |retention |strategy |is |compared |with |that |of |insurance |with |the |intention |of |determining |the |optimal |trade |off |between |
retained |risk |and |risk |transfer.
4. |lastly |once |decision |has |been |taken |then |the |appropriate |fund |retention |facility |must |be |determined. |the |org |may |create |an |internal |fund |or |create |a |
captive |insurance |company.
Discuss |the |criteria |for |evaluating |the |quantum |of |retention |funding |(10 |marks) |- |ANS |-- |the |effectiveness |of |a |retention |fund |is |affected |by |the |effect |that
|the |fund |has |on |the |value |of |the |firm
- |the |test |is |should |the |funding |have |a |more |positive |effect |on |the |value |of |the |firm |than |other |forms |of |financing, |then |it |must |be |preferred;
1. |value |of |firm:
-Value |of |the |firm |is |the |the |sum |of |the |value |of |the |operations |and |the |value |of |the |investments.
