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RSK 4803: Risk Retention questions and answers 2024/2025
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RSK 4803: Risk Retention questions and answers 2024/2025
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RSK 4803: Risk RetentionWHAT IS RISK RETENTION - ANS- Category of risk financing;
- when a company intentionally or unintentionally retains the financial
consequences of of a loss for its own account and does not transfer it to a 3rd
party;
it is usually effective when:
- on other financing methods available,
- the worst possible loss is not serious and
- losses are highly unpredictable.
what is funded retained risk - ANSwhen the co. makes provision for losses
prior to their occurrence;
- the funds are prepaid into a fund to finance predicted losses;
- the annual amount required to be retained is determined by assessing the
co's historic loss pattern which reflects an organisation's well-defined loss
distribution.
advantages of funded risk retention - ANS- it is a viable alternative for when
there is not market for that particular risk; or
the risk can not be fully transferred through insurance.
- it may also be less expensive than risk transfer in that:
it has reduced transaction costs;
has a faster claim processing ability with no claim disputes;and
also promotes sound risk control program.
what are the disadvantages of funded retention? - ANSit might create an
unwarranted compliance and belief that the extent of the loss will be offset by the
fund and
it also has the effect of reducing the value of the firm once the funds are used
toward the loss.
what is an unfunded risk retention? - ANSIt is when losses are funded from
the company;s cash flow and
no formal provision for losses.
- it relates to risk for which there is not insurance and
- risk for which there is insurance but the firm decides not to insure.
why would a firm decide on unfunded risk retention? - ANS- when risk falls
with in the category of high frequency but low severity; or
- the cost of insurance outweighs the benefit of insurance; or
- the loss emanates from an incident for which there is no cover and as a
result insurance is not practical.
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