6.3 Chapter Summary

In Chapter 6 the focus is on how organizations address identified risks through strategic actions and decisions. The chapter begins by defining risk response as the approaches an organization uses to manage risks, which involves a risk assessment process consisting of identification, analysis, and evaluation. Tools such as risk registers and maps help visualize risks based on their likelihood and impact, aiding in developing a risk profile that aligns with the organization’s risk appetite—the level of risk an organization is willing to tolerate or pursue in achieving its objectives.

Risk treatment, often interchangeable with risk control, encompasses various techniques to manage risks. These include risk avoidance, modifying the likelihood or impact of risks, risk transfer, risk retention, and risk exploitation. Risk avoidance involves stopping activities that generate risk, while modifying likelihood or impact entails preventive measures or controls. Risk transfer shifts financial responsibilities to another party through insurance or contracts. Risk retention keeps financial responsibilities within the organization, often through self-insurance. Risk exploitation aims to maximize benefits from opportunities. Additionally, risk control techniques for hazard risks—pure risks leading only to negative outcomes—are detailed, including avoidance, loss prevention, loss reduction, separation, and duplication. These strategies ensure a comprehensive approach to managing both the upside and downside of risks across various categories.

OpenAI. (2024, July 29). ChatGPT. [Large language model]. https://chat.openai.com/chat

Prompt: Please take the chapter content in this document attached and summarize the key concepts into no more than two paragraphs. Reviewed by authors. 

• Avoidance is a risk control technique that terminates risk by stopping or never undertaking the activity or activities that have the potential to cause a risk to occur.
• Captive insurance company is a hybrid risk financing plan that is a subsidiary of a parent company that is not an insurance company.
• Derivatives are financial contracts that derive their value from another asset.
• Duplication is a risk control technique that keeps alternate assets in reserve to reduce the severity, impact and consequences caused by the loss of an organization’s primary assets.
• Guaranteed cost insurance is a primary risk transfer mechanism involving insurance contracts that provide coverage for insurable perils.
• Hard market: a hard market results in higher insurance rates and a reduced capacity or availability of insurance.
• Hazard risks are pure risks that have a chance of loss; no loss but no gains can be realized; there are only negative outcomes.
• Hybrid risk financing plan incorporates the elements of both risk transfer and risk retention as funds are available from both inside and outside of the organization.
• Loss prevention is a risk control technique that is similar in its intent to modify the likelihood of the risk, which was described as a risk treatment for risks included under enterprise risk management.
• Loss reduction is a risk control technique that is similar in its intent to modify the impact of the risk, which was described as a risk treatment for risks included under enterprise risk management.
• Modifying the likelihood of a risk is a risk treatment technique that involves measures to decrease or change the probability or frequency of the positive or negative effects of a risk through corrective actions or controls.
• Non-insurance contracts transfer the financial consequences of an event or future event based on a relationship with a party other than an insurance company by contractual agreement.
• Reinsurance is a transaction that transfers the financial consequences of insurance risk from a primary insurance company (in this case, the captive) to another insurance company known as a reinsurer.
• Risk adverse is when organizations are reluctant or unwilling to take on risks, indicating a low-risk tolerance.
• Risk aggressive is when organizations actively take on risks even in the absence of controls, indicating a high-risk tolerance.
• Risk appetite is the amount of risk that an organization is willing to retain, tolerate or seek in pursuit of its objectives.
• Risk avoidance is a risk treatment technique that terminates risk by stopping or never undertaking the activity or activities that have the potential to cause a risk to occur.
• Risk Exploitation is a risk treatment technique that involves actions or activities that are taken to ensure that the benefits from an opportunity are maximized by the organization.
• Risk Response is a broad term that is used to describe the approaches that an organization will use to manage its risks. It is a plan to manage risks derived from information that is received after conducting a risk assessment.
• Risk Retention is a risk treatment technique where the organization retains the financial responsibilities of future losses.
• Risk transfer is a risk treatment technique that is used to shift the financial responsibilities of future losses to another party.
• Risk treatment describes the specific actions and decisions that an organization will use to modify the upside and the downside of the risks that have been identified and analyzed by the organization.
• Self-insurance is a practice that involves setting funds aside to cover the consequences of retained losses. It is a technique that is selected by an organization to reduce its cost of risk when the organization can predict its future losses with a degree of accuracy.
• Separation is a risk control technique that spreads assets or activities over several locations to reduce the severity, impact or consequences of a negative event at one location, affecting only that location and not the entire organization.
• Soft market: during a soft market, there is an abundance of insurance markets available, and rates are low.