Question

Hi, can you answer this question in more detail?

Subject: Insurance Practices

Q4：

There are two major types of risk management tools, namely, risk control and risk financing. Discuss the details of these tools with examples.

Answer 1

Risk control is a strategy that aims to identify,assess, and prepare for dangerous situation both physical and figurative that may interfere with an organization's operation.The methods of risk control include avoidance, loss control, loss reduction, separation and duplication .

a) Avoidance :- This is the best method of risk control. If a company is being harmed by something, then find an alternative to replace it. For eg:- Workers being harmed by a particular chemical, then find an alternative to replace it.

b) loss reduction :- It refers to accepting the risk , but attempting to limit it .For eg:- A fire can be caught in a factory due to any reason, so we cannot avoid it but can control it by having extinguishers, sand and so on.

c) loss control:- it refers to accepting the risk but attempting to control it. For eg:- Theft can be controlled by installation of cameras.

d) Separation:- Separation refers to separating the risk to one place, due to which others cannot be harmed.For eg:- Opening of company production units at different location. If one place is affected by electricity shortage, others will not be affected by the same.

e) Duplication:- It refers to creating a backup plan using technology. For eg:- A company may have two servers, like an aeroplane having two engines, if one fails the other can still keep it up.

Risk financing is the determination of how an organization will meet its losses at the time of a loss events in the most effective and least costly way. This is done for an organization to grow by taking risk and without any hindrance in paying for the risk. Companies have variety options when it comes to protecting themselves from risk. For eg:- self insurance , captive insurance and other risk scheme , whose effectiveness depends on the size of the organization and the amount of risk taken. Last but not the least, risk financing not only ensures financing the loss events but also makes sure that the company runs smoothly after it.