Examkin

Question

Difficulty: HardMethods of Handling Risk

A regional municipality is restructuring the risk management protocols for its public transit system to better control rising operational costs. The risk management committee reviews various strategies to handle the exposures associated with operating a large fleet of buses. Based on the fundamental methods of handling risk, which of the following specific actions implemented by the municipality correctly illustrate the method of Risk Retention? (Select all that apply)

  1. Allocating a specific portion of the annual budget to cover minor physical damage to buses out-of-pocket rather than filing insurance claimsAnswer
  2. B
    Negotiating a hold-harmless agreement that requires independent maintenance contractors to bear the legal liability for repair depot accidents
  3. C
    Terminating all late-night transit operations in certain zones to entirely eliminate the exposure to after-hours vandalism
  4. Selecting a commercial fleet insurance policy that incorporates a $25,000 per-occurrence deductible for major liability claimsAnswer

Answer

The correct actions are allocating a specific budget to cover minor physical damage out-of-pocket and selecting a policy with a $25,000 per-occurrence deductible.
Risk retention involves assuming the financial responsibility for a loss. The correct answers demonstrate this method because paying for minor physical damage out-of-pocket (self-insuring) and accepting a deductible on an insurance policy both require the municipality to retain a specific portion of the financial risk associated with its operations.

Step-by-Step Solution

1
Define the target concept of Risk Retention.
Risk Retention means the individual or entity assumes the financial responsibility for a loss, either entirely or partially.
Establishing the definition provides the criteria to evaluate each scenario.
2
Evaluate the budget allocation action.
Setting aside municipal funds to pay for minor damages out-of-pocket directly matches the definition of retention (specifically, self-insurance).
The municipality is intentionally choosing to bear the financial cost of these specific losses.
3
Evaluate the insurance deductible action.
A deductible represents the amount of a loss that the insured must pay before the insurer covers the rest. Therefore, a deductible is a form of partial risk retention.
Even within a risk transfer mechanism (an insurance policy), the deductible remains the retained portion of the risk.
4
Eliminate the distractors.
The hold-harmless agreement is risk transfer (shifting liability to the contractor), and terminating late-night operations is risk avoidance (eliminating the exposure completely).
Neither of these actions involves the municipality absorbing the financial impact of a loss that actually occurs.

Key Concept

Risk Retention (including self-insurance and deductibles)
Rate this question

Topics

Methods of Handling Risk

More questions from this topic