Question

1. What conditions should be fulfilled before retention is used in a risk management program (3 points)? 2. You operate a food supply company. Your primary customers are restaurants. You provide delivery services to select customers Determine the potential direct and indirect losses that you might incur because of your delivery operations (7 points)

Answer 1

Before retention is used as a risk management tool, the following conditions must be fulfilled.

1. The losses can be predicted fairly. When the losses can be predicted reasonably then, the firm can use the retention risk management since there is certainty that if a certain risk occurs, it will lead to losses of a specific amount.
2. In case the worse probable loss will not cause harm to the entity. If an occurrence of risk will not harm an entity for example liquidity of an entity will not be affected then a firm can adopt retention as a method of risk retention.
3. When there is no other method available for risk management a firm has zero opportunity cost meaning that they have no other alternatives but to take retention as a risk management tool.

direct losses include, loss due to stale food, faulty supply etc

indirect losses include loss due to fire, accident, legal loss, and other non regular losses