Question

2. Explain the concept of risk reduction. Discuss the concept of funded risk assumption.

Answer 1

The terminology "risk reduction" is a term that is often interpreted as reduction of financial losses. It is referred to as loss mitigation management technique. It refers to all such steps - preventive & precautionary measures that help in minimizing the chances and severity of incurrence of high loss situation.

For example - installation of security system to help prevent theft ; use of fire proofs to prevent catching of fire ; constructing & designing earthquake resistant buildings & infrastructure to reduce the loss during earthquake like situations ; using hedging technique against inflation ; diversify financial portfolio to minimize the risk of loss due to fall in security value.

The "funded risk assumption" is purchasing a risk cover that is assumed to exist in course of performance of an event. Such purchase are considered funded risk assumption and helps protect against un-expected loss event. Another instance that this terminology is used to indicate is the cost incurred by the government in enforcement of different safety acts to prevent losses of specific types such as The Clear Air Act, The Water Pollution Control Act and Food & Drug Administration.