Risk Management Techniques
| Technique | What the Technique Does | Example |
| Avoidance | Eliminates the chance of a particular type of loss by either disposing of an existing loss exposure or by not assuming a new exposure | A family decides not to purchase a boat and therefore avoids the property and liability loss exposures associated with boat ownership. |
| Loss Control 1. Loss prevention 2. Loss reduction | Lowers frequency and/or severity of losses Lowers loss frequency (number of losses) Lowers loss severity (dollar amount of losses) | A business installs a burglar alarm system in attempt to prevent burglaries. A business installs a sprinkler system to reduce the amount of fire damage from potential fires. |
| Retention | Retains all or part of a loss exposure (intentionally or unintentionally) which means that losses must be paid for with available funds or other assets | A business decides not to purchase collision coverage for its fleet of vehicles and sets aside its own funds to pay for possible collision losses. |
| Noninsurance transfer | Transfers potential financial consequences of a loss exposure from one party to another party that is not an insurance company | In a lease, a landlord transfers the liability exposures of a rented building to the tenant. |
| Insurance | Transfers financial consequences of specified losses from one party (the insured) to an insurance company in exchange for a specified fee (premium). | A family purchases homeowners and personal auto policies from an insurance company. |
Decisions Based on Financial Criteria
Financial management standards typically call for making those choices that promise to increase profits and/or operating efficiency.
Decisions Based on Informal Guidelines
Do not retain more than you can afford to lose.
Do not retain large exposures to save a little premium.
Do not spend a lot of money for a little protection.
Do not consider insurance for a substitute of loss control.
Managing Loss Exposures: Risk Management
