Question

Provide an example to illustrate how and where EACH technique could be employed. a) Avoidance b) Separation c) Combination d) Transfer (control) e) Loss control f) Risk retention/ Self-insurance g) Transfer (financing risk via insurance). h) transfer- Financial risk transfer by means other than insurance

Answer 1

1. Avoidance can be applied to construction companies where they may simply avoid project due to environmental constraints
2. Seperation can br applied to housing development firms where they can invest in seperate locations with least amount of complexity
3. Combination can be applied to stock broking firm where fund manager invests in combination of funds as per weighted average to minimize volatility and risk.
4. Transfer control - This happens when loss making company transfers the controls to another risk bearing company with its risks.
5. Loss control can be applied when fire management company uses sprinkler systems to minimise severity of loss by fire.
6. Risk retention takes place when conglomerates retain all risks and donot transfer to newly established companies within firm because of inexperience.
7. Transfer finance risk is applied to logistic firms for supply of goods through watereays when risk of insurance is borne by supplier.
8. Transfer finance risk through other modes is applied to banks whrn they get acquired by larger banks and hence credit risks of non performing assets are transferred to acquirer bank.