BU353 Study Guide - Midterm Guide: Forego, Insurable Interest, Cash Flow
Document Summary
Damage to assets, injury/illness to employees, liability claims and defence costs: indirect losses. Loss of normal profit (net cash flow), higher costs of funds & foregone investment, bankruptcy costs: distinguish between risk control and risk financing, risk/loss control involves decisions to invest or forego resources to reduce expected losses. Loss prevention reduces the frequency of loss (an extreme example is loss avoidance) Loss reduction reduces the severity of the loss (pre or post loss: risk/loss financing refers to decisions about how to pay for losses if they occur. Retain costs of losses (through reserves, issuing debt/equity or obtaining loans) Transfer cost of losses (through insurance, hedging such as futures/forwards/options/swaps: methods of risk identification. Checklists, financial statements, discussions with managers, employee surveys, insurance professionals, risk management consultants: qualitative analysis of risk control strategies. Compare the benefits to the costs of the loss control strategy. Trade-off: cost of increased precautions vs. benefit of reduced expected losses.
