QS Study

Pure Risk includes fire, earthquake, theft etc. In case of fire risk, through improved security measures the impact of fire risk can be reduced. Because risk is the possibility of a loss, people, organizations, and society usually try to avoid risk, or, if not avoidable, then to manage it somehow. There are 5 major methods of handling risk:

  • Avoidance,
  • Loss control,
  • Retention,
  • Noninsurance transfers,
  • Insurance.

(a) Avoidance is the elimination of risk. You can avoid the risk of a loss in the stock market by not buying or shorting, stocks; the risk of a venereal disease can be avoided by not having sex, or the risk of divorce, by not marrying; the Ask of haying car trouble, by not having a car. Many manufacturers avoid legal risk by not manufacturing particular products.

(b) Risk retention is handling the unavoidable or un-avoided risk internally, either because insurance cannot be purchased or it is too expensive for the risk, or because it is much more cost effective to handle the risk internally. Usually, retained risks occur with greater frequency, but have a lower severity. An insurance deductible is a common example of risk retention to save money since a deductible is a limited risk that can save money on insurance premiums for larger risks. Businesses actively retain many risks – what is commonly called self-insurance – because of the cost or unavailability of commercial insurance.

(c) Loss control or risk reduction can either be effected through loss prevention, by reducing the probability of risk, or loss reduction, by minimizing the loss. Loss prevention requires identifying the factors that increase the likelihood of a loss, then either eliminating the factors or minimizing their effect.

(d) Noninsurance transfers mean shift risk to someone else. E.g., The use of health insurance is an example of transferring risk because the financial risks associated with health care are transferred from the individual to the insurer.

(e) Insurance has evolved as a process of safeguarding the interest of people from loss and uncertainty. The process of insurance has been evolved to safeguard the interests of people from uncertainty by providing certainty of payment at a given contingency.

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