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Question

Difficulty: MediumMethods of Handling Risk

To manage the rising costs of employee health benefits, a mid-sized software development firm decides to transition away from a traditional, fully insured health plan. Instead, the firm chooses to pay for its employees' routine medical and prescription expenses directly out of its own corporate operating funds. The firm only purchases a separate stop-loss policy to protect against catastrophic claims that exceed a specific threshold. Regarding the routine medical expenses paid directly by the firm, which method of handling risk is being employed?

  1. Risk retentionAnswer
  2. B
    Risk transfer
  3. C
    Risk reduction
  4. D
    Risk avoidance

Answer

Risk retention
Risk retention is the method of handling risk where an entity assumes the financial responsibility for losses. By choosing to self-insure and pay for routine medical expenses directly out of its own operating funds, the software development firm is retaining that portion of the risk.

Step-by-Step Solution

1
Analyze the firm's financial approach to the routine medical expenses.
The firm is paying for these expenses directly out of its own corporate operating funds rather than paying premiums for an insurer to cover them.
Identifying who bears the direct financial loss is necessary to determine the risk handling method.
2
Classify the financial approach using STARR methods (Sharing, Transfer, Avoidance, Reduction, Retention).
Self-insuring and paying for losses out of pocket represents accepting and keeping the risk internally.
Keeping the financial responsibility for a risk, either intentionally or unintentionally, is the definition of risk retention.

Key Concept

Risk Retention (Self-Insurance)
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Topics

Methods of Handling Risk

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