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CHAPTER 8 (risk retention/ risk reduction (factors affecting the costs of …
CHAPTER 8
risk retention/ risk reduction
risk retention is decision to accept the uncertainly associated
risk reduction is decision to reduce the uncertainty
benefits of increased retention
save on premium loading
reduce exposure to insurance
reduce moral hazard
avoiding implicit taxes
maintain use of funds
avoid high premium
factors affecting the costs of increased retention
ownership structure
firm size
correlation of losses
investment opportunities
product characteristics
correlation of losses with other cash flow
financial leverage
evidence on risk reduction decision
insurance companies use of reinsurance
use of derivatives by industrial firms
gold mining companies
oil & gas procuders
what should be hedged?
aggregated approach
disaggregated approach
disaggragated approach vs aggregated approach
transaction cost
unnecessary coverage argument
complexity problem
moral hazard problem
4 factors that should consider before it adopts a partial retention program for collision losses to company cars
company's pass loss experiance
dollar amount of losses the firm will retain
added costs of losses
elements of the premium
availability of excess
hedging using derivatives
option - a contract between 2 parties
payoff
put option
basis risk
swap contracts
forward / futures contracts
forward price & futures price
comparison of derivatives & insurance
basis risk and extent of risk reduction
liquidity
contracting cost