Question

Question 1 Upgrade Limited manufactures and sells ladders used by construction firms. The product is mainly being exported and sold directly to independent retailers in the United Kingdom. Based on the historical loss data, the company’s risk manager identified that there are several lawsuits arising out of bodily injuries or property damages to motorists or pedestrians by the defective or improper use of ladders. The risk manager is now considering risk management techniques to treat the loss exposure of potential lawsuits.

(a) As you are the risk manager, identify the loss exposure based on the above information.

(b) Describe the TWO measurements used to quantify the loss exposures.

(c) Propose any TWO different risk control techniques with feasible actions in dealing with the loss exposure in part (a).

(d) Suggest any TWO different risk financing techniques with feasible actions in dealing with the loss exposure in part (a).

Question 2 KK supermarket sells supreme quality groceries locating in Central. The shop owner purchased commercial insurance insuring his business against money loss, theft and public liability from Jump Insurance. Last month, KK supermarket was burglarized, $20,000 cash and 10 boxes of abalone (valued $10,000) were lost. However, Jump Insurance denied coverage under the policy as the alarm system was disabled at the time of loss. Jump Insurance insisted that the owner is obligated to ensure the alarm system is well-functioning. KK supermarket appealed that “installation of security alarm system is required” is the only policy wordings stated in the insurance contract. Following the loss prevention measure required by Jump Insurance, KK supermarket installed a security alarm system by an approved security company. On the ground of the “installation of security alarm system is required” is the only policy wordings as loss prevention measure in the insurance contract, the court verdict stated that Jump Insurance cannot deny coverage and should pay on KK supermarket’s claim due to the burglary.

(a) What is a peril? Identify the peril based on the above information.

(b) Which part of insurance contract that specified the required loss prevention measures for the coverage? Describe briefly.

(c) Attorney defended KK supermarket with legal principle(s) and/or characteristic(s) in insurance contract. Hence, KK supermarket can recover loss from Jump Insurance in the court verdict. What are the arguments? Explain.

(d) KK Supermarket gets no more than the actual amount of the loss regardless the number of commercial insurance policies the shop owner bought for his business. Which ONE of the principles of insurance does it refer? What are its purposes?

Answer 1

Question 1

(a) Two types of loss exposure have been experienced in the provided situation.

1. Indirect or consequential losses - These are losses which occur, as a result of damage to real or personal property. Due to the improper use of the ladders, property damages to motorists and pedestrians have been reported. So the first type of loss exposure experienced here is indirect losses.

2. Casualty losses - These are the losses which arise due to any case of bodily damage or injury caused to a person. Due to the improper use of ladders, bodily injuries to motorists and pedestrians have been reported. So the second type of loss exposure experienced here is casualty losses.

(b) I do not have the subject knowledge for this part right now.

(c) The two different risk control techniques in dealing with the loss exposures in the provided situation are :

1. Loss Prevention - As a risk control technique, the goal of loss prevention is to reduce the probability of losses from a given exposure thereby reducing the number of losses from that exposure over time and cutting the cost of paying for those losses. In the given situation, the risk can be reduced from the part of Upgrade Limited by emphasising more on the quality and ensuring that there is no possible chance of their product malfunctitioning and causing the damage. Eg : imagine the ladders are being used for some work outdoors on a rainy day. If the base of the ladder is not stable enough, the risk of any mishappening can increase. Therefore, if the company ensures optimum quality of their products, risks can be reduced to a great extent from their side. Now the risk lies in the way of its use. If the person or the party using the ladder is not careful enough there are still chances for mishappenings. therefore both the parties, i.e., the manufacturer as well as the user has to be vigilant.

2. Transfer - Contract that transfers to another legal entity the legal responsibility for performing a particular activity and for bearing specified types of loss that might result from that activity. If Upgrade Limited makes a contract with it's customers regarding transfer of legal responsibility for the handling and use of the goods, then even on an occassion of any mishappening, the company won't be held liable for any loss incurred due to mishandling on part of the user.

(d) Two different risk financing techniques are :

1. Risk Retention - It refers to use of organisation's internal funds to finance the losses. It also includes

(i) Paying the losses as current expenses.

(ii) Establising a reserve.

(iii)Payment of loss from organisation captive insurance management.

United Limited can use this technique to finance its risk.

2. Hybrid technique - It invloves the combination of internal and external sources of funds to pay for the losses.

United Limited can either pay from its equity or borrowed funds depending upon the feasibility at the time.