Question 3 Organizations may decide to retain risk within the enterprise. Analyze the principal methods of risk retention available to the organization
Question 3 Organizations may decide to retain risk within the enterprise. Analyze the principal methods of risk retention available to the organization. (100 marks) The principal methods of risk retention available to a firm non replacement where the organization absorbs the loss out of income and does not replace the asset concerned; Losses as a result of certain risk are treated as current operating costs and the retention is treated as a current expense. Other methods include the use of contingency reserve whereby a part of surplus from trading each year is held in a reserve to cover expected losses; internal risk fund which is a separate fund to ensure the availability of liquid funds to pay any losses; external risk fund whereby contributions are paid to an insurer who operates the fund rather than into an internal fund; firms may also set up an insurance subsidiary such as a captive insurance company which ensures all or some of the organizations risk; lastly an organization may decide to use borrowing facilities either internal or external to meet the cost of losses.