Topic 5 Risk Management Alternatives. BUS 200 Introduction to Risk Management and Insurance Jin Park. Overview. All risk management alternatives are either risk control options or risk financing options. Risk Control Options Deal with risk itself Risk Financing Options
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Topic 5Risk Management Alternatives
Introduction to Risk Management and Insurance
Use of funds set aside to pay for future losses
Potentially less expensive
Can retain full benefit of any successful loss prevention/reduction program
Flexibility in the design of insurance program
Possibility of a catastrophic loss
Need to perform the administrative tasks associated with insurance
Difficult to jump back into the insurance market once a firm has left
Deniable claims may not be denied since it is managed by employer
Premium payments are not tax deductible
No other income
No tax deduction for loss reserves
Claims are tax deductible when paid
Premium payments are tax deductible
Captive Has deduction for loss reserves on discounted Basis
Discount rate of 5%
Present value of tax deduction = $3,046,117
Discount rate of 5%
Present value of tax deduction = $3,333,333
Risk Retention Group
A liability insurance company.
The owners of the RRG must be its insureds.
Membership in the RRG is limited to persons engaged in similar businesses or activities with respect to the liability to which they are exposed.
A RRG must file annual financial statement
Not an insurance company.
Could be a member of a RRG.
Any group of persons with similar or related liability risks who form an organization to purchase liability insurance on a group basis.
No specific requirements regarding the legal structure of the PG.