Page 25 - Insurance Times August 2023

management and supervisory activities, comparisons, Spreading: Spread risk means the risk of loss on a position
reconciliations, and other routine actions. The scope and that could result from a change in the bid or offer price of
frequency of separate evaluations depend primarily on the such position relative to a risk free or funding benchmark,
assessment of risks, effectiveness of ongoing monitoring, including when due to a change in perceptions of
and rate of change within the entity and its environment. performance or liquidity of the position.The spread of
Monitoring and review should be a planned part of the risks refers to whether or not the risks assumed by the
risk management process and involve regular checking or company are spread out or are they concentrated in one
surveillance. The results should be recorded and type of risk, such as earthquake insurance in California. If
reported externally and internally, as appropriate. the latter is the case, the company is vulnerable to one
Once risks are identified, assessed, and a response is natural catastrophe that could impact the solvency of the
decided upon, the organization will then need to monitor company.
risk(s) to see what has changed and how it impacts the
Loss prevention and Reduction: When risk cannot be
organization.
avoided, the effect of loss can often be minimized in terms
of frequency and severity. For example, Risk Management
Methodology in ERM:
encourages the use of security devices on certain audio visual
There are five basic techniques of risk management:
equipment to reduce the risk of theft. Loss control (a.k.a.
Avoidance.
risk reduction) can either be effected through loss
Retention. prevention, by reducing the probability of risk, or loss
reduction, by minimizing the loss. Loss prevention requires
Spreading.
identifying the factors that increase the likelihood of a loss,
Loss Prevention and Reduction.
then either eliminating the factors or minimizing their
Transfer (through Insurance and Contracts) effect.
Avoidance: Risk avoidance is one risk treatment (or risk
Transfer through Insurance contracts: Risk transfer is a
control) strategy in enterprise risk management (ERM).
risk management and control strategy that involves the
Avoidance means taking some action to prevent the risk
contractual shifting of a pure risk from one party to another.
from occurring. For instance, you may shut down a site or
One example is the purchase of an insurance policy, by which
facility in bad weather to avoid the chances that someone
a specified risk of loss is passed from the policyholder to the
might get hurt.Risk avoidance means completely eliminating
insurer. When a policyholder takes out insurance from an
any hazard that might harm the organization, its assets, or
insurance agent, they transfer financial risks to the insurer.
its stakeholders; and removing the chance that the risk might
become a reality. This strategy aims to deflect as many
In exchange for doing this, the insurance companies often
threats as possible to avoid their costly consequences.
charge a fee, or the insurance premium. Another way to
transfer risk is through indemnification clauses in contracts.
Retention: Retention refers to the assumption of risk of loss
The most common way to transfer risk is through an
or damages. This expresses how a party, usually a business,
handles or manages its risk. When a business retains risk,
they absorb it themselves, as opposed to transferring it to
an insurer.Retention of risk is the net amount of any risk
which an insurance company does not reinsure but keeps
for its own account. The reinsurer will indemnify the ceding
company against the amount of loss on each risk in excess
of a specified retention of risk subject to a specified limit.
Examples include:
When a business owner determines the cost associated
with loss coverage is less than that of paying for partial
or full insurance protection.
When a given risk is uninsurable, is excluded from
insurance coverage, or if losses fall below insurance
policy deductibles.

20 August 2023 The Insurance Times