Risk managers use a number of methods for handling risk. For each of the followi
ID: 445166 • Letter: R
Question
Risk managers use a number of methods for handling risk. For each of the following, identify the method for handling risk and briefly explain that method.
• The decision not to carry earthquake insurance on a firm’s main manufacturing plant. • The installation of an automatic sprinkler system in a hotel. • The decision not to produce a product that might result in a product liability lawsuit. • Requiring retailers who sell the firm’s product to sign an agreement releasing the firm from liability if the product injures someone. • Purchase a travel insurance for a trip to Philippine that covers all potential medical expense.
Explanation / Answer
Answer:
1. The decision not to carry earthquake insurance on a firm’s main manufacturing plant:
Loss Prevention and Reduction: When risk cannot be avoided, the effect of loss can often be minimized in terms of frequency and severity. For example, we cannot stop earthquake as it is not in our control, so to be financially capable and minimize the damage, we will use this method to secure firm’s main manufacturing plant.
2. The installation of an automatic sprinkler system in a hotel:
Avoidance: Many times it is not possible to completely avoid risk but the possibility should not be overlooked. For example: Also sudden fire in hotel by any reason cost a lot for hotel. Hence it is better to install sprinkler system to avoid big fire from small fire due to small accidents. Another example is, at the height of a blizzard, Car Fleet may not release vehicles for travel until the weather begins to clear, thus avoiding the risk of auto accidents during severe weather.
3. The decision not to produce a product that might result in a product liability lawsuit:
Avoidance: Many times it is not possible to completely avoid risk but the possibility should not be overlooked.
4. Requiring retailers who sell the firm’s product to sign an agreement releasing the firm from liability if the product injures someone:
Transfer: In some cases risk can be transferred to others, usually by contract. When outside organizations use University facilities for public events, we require that they provide evidence of insurance and name the University as an additional insured under their policy, thereby transferring the risk from the University to the user.
5. Purchase a travel insurance for a trip to Philippine that covers all potential medical expense:
Transfer: In some cases risk can be transferred to others, usually by contract. The purchase of insurance is also referred to as a risk transfer since the policy actually shifts the financial risk of loss, contractually, from the insured entity to the insurance company.
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