Question

Explain the REASONS for choosing to use EACH of following techniques for dealing with pure risks AND provide an example to illustrate how EACH technique could be employed. 2 a) Avoidance b) Separation c) Combination d) Transfer (control) e) Loss control f) Self-insurance g Transfer (financing)

Answer 1

Techniques of dealing with pure risks:

• Avoidance: this is a method for mitigating the risks by not participating in activities that might cause injury, sickness or death. For example smoking is one such activity because avoiding it can lessen both health & financial risks.
• Separation: this is a technique that disperses particular asset of activity over several locations & relies on that asset or activity as part of organization’s working resources. This is usually a byproduct of another management & can reduce the severity of risks but can increase the frequency of loss.
• Combination: using a combination of avoidance, loss prevention & control, transfer techniques etc. as the most flexible & efficient way to manage risks. The combined approach can provide a standard of risk management. For example we can take the example of an investor who invests in combination of various portfolios. By designing his portfolio in such a manner, he can offset the loss from portfolio with the profits from other portfolio.
• Transfer: transfer is nothing but transferring our risks to a third party in order to manage the unforeseen risks. We can consider the example of insurance companies or insurance provided by employers to employees where we reduce the risk or manage the risk to certain extent by sharing the risk with these people.
• Loss control: this technique can minimize the risk rather than eliminating it completely. While accepting the risk, it focuses on keeping the loss contained & preventing from spreading it. A good example of this is health insurance which is a preventative care.
• Self insurance: this is a technique which is adopted by every individual to one self in order to protect them from unexpected risks. Example of this can be a businessman insuring his business to protect himself in case of any unexpected damages which could destroy his factory or company from any fire accidents or any other natural disasters.
• Transfer: the best example for this is health insurance where the insurance companies assume the financial risk of an individual to the insurer. Insurance companies assume such financial risks in exchange for a fee known as premium & a documented contract between the insurance company & the individual.