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Difficulty: HardMethods of Handling Risk

A logistics corporation, Apex Freight, recently revamped its corporate risk management program after a comprehensive internal audit. The company implemented the following strategic changes to its operations:

1. Apex completely ceased all operations involving the transport of hazardous chemicals.
2. The company installed advanced telematics and automatic emergency braking systems across its entire fleet of delivery vehicles.
3. Apex established a dedicated, self-funded reserve account of 100,000toindependentlycoveranyphysicaldamageclaimsunder100,000 to independently cover any physical damage claims under 5,000 for its own vehicles.
4. The company secured a robust commercial general liability insurance policy to cover potential third-party bodily injury claims.

Based on this scenario, which of the following accurately identify the risk handling methods utilized by Apex Freight? (Select all that apply.)

  1. Ceasing the transport of hazardous chemicals demonstrates risk avoidance, as the exposure to pollution liability is entirely eliminated.Answer
  2. B
    Securing the commercial general liability policy demonstrates risk sharing, because the insurer distributes the losses among many policyholders.
  3. Setting aside $100,000 in a dedicated account to pay for physical damage demonstrates risk retention, as the company assumes the financial responsibility for these specific losses.Answer
  4. D
    Installing telematics and automatic emergency braking systems demonstrates risk avoidance, as these technologies prevent accidents from occurring.

Answer

The correct methods are ceasing the transport of hazardous chemicals (risk avoidance) and setting aside a dedicated account to pay for physical damage (risk retention).
Ceasing operations that cause risk is the textbook definition of risk avoidance. Furthermore, intentionally setting aside funds to pay for losses out-of-pocket (self-insuring) is the definition of risk retention.

Step-by-Step Solution

1
Analyze the first action taken by Apex Freight (ceasing the transport of hazardous chemicals).
This action eliminates the specific risk completely.
Eliminating an exposure entirely by refusing to engage in the hazardous activity is defined as risk avoidance.
2
Analyze the second action (installing telematics and braking systems).
This action mitigates the likelihood and severity of an accident, but the risk of driving remains.
Taking steps to minimize loss frequency or severity without completely eliminating the activity constitutes risk reduction, not risk avoidance.
3
Analyze the third action (setting aside a $100,000 reserve for damages).
The company is choosing to absorb the financial impact of these smaller losses internally.
Assuming the financial burden of a risk, often through self-insurance, self-funding, or deductibles, is defined as risk retention.
4
Analyze the fourth action (purchasing a commercial liability policy).
The financial consequences of third-party claims are passed to an insurance company.
Paying a premium to pass the financial burden of a loss to an insurer is risk transfer, not risk sharing (which involves a group of individuals formally pooling their own similar risks).

Key Concept

Methods of Handling Risk (STARR: Sharing, Transfer, Avoidance, Reduction, Retention)
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Methods of Handling Risk

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