FIS 250 Week 1 CheckPoint: Risk Management Methods

Michael is a college senior who is majoring in marketing. He owns a high-mileage 1998 Ford that has a current market value of $2500. The current replacement value of his clothes, television set, stereo set, cell phone, and other personal property in a rented apartment totals $10,000. He wears disposable contact lenses, which cost $200 for a six-month supply. He also has a waterbed in his rented apartment that has leaked in the past. An avid runner, Michael runs five miles daily in a nearby public park that has the reputation of being extremely dangerous because of drug dealers, numerous assaults and muggings, and drive-by shootings. Michaels parents both work to help him pay his tuition. For each of the following risks or loss exposures, identify an appropriate risk management technique that could have been used to deal with the exposure. Explain your answer. a. Physical damage to the 1998 Ford because of a collision with another motorist: Risk (active) retention is the right risk management technique to use in this situation. Michael is aware of the risk of an accident and plans ahead to retain all or part of the risk by purchasing auto insurance. b. Liability lawsuit against Michael arising out of the negligent operation of his car: Auto insurance is the appropriate risk management technique in this situation. Taking into consideration the risk of unexpected accidents, liability coverage on a vehicle is vital. Liability risks are a type of pure risk. Appropriate liability coverage will lessen the expense to Michael should he be sued. c. Total loss of clothes, television, stereo, and personal property because of a grease fire in the kitchen of his rented apartment: Loss Control Prevention is the appropriate risk management technique in this situation. Should your rented apartment or home burn down the home owner will have insurance coverage to replace the actual home; however, your personal belongings will not be covered. Prevention by taking out a renters policy can help eliminate the loss of your personal belongings in case of fire, theft, and loss. d. Disappearance of one contact lens: Risk retention passive is the appropriate risk management technique in this situation. Risk can be retained passively. Risk retention is important for high-frequency, lowseverity risks where potential losses are relatively small (Rejda, 2008) such as misplacing or losing one disposable contact lens. e. Waterbed leak that causes property damage to the apartment: Active retention is the appropriate risk management technique in this situation. By purchasing a renters policy the renter will pay a small deductible but not have the cost of paying for the damage done not only to the apartment but perhaps to one that could be below.

f. Physical assault on Michael by gang members who are dealing drugs in the park where he runs: Avoidance would be the best risk management technique in this situation. If Michael is unable to move into a safer neighborhood with a better park to run, he can reduce the risk of assault or being hurt by avoiding that park. g. Loss of tuition assistance from Michaels father who is killed by a drunk driver in an auto accident: Insurance is the appropriate risk management technique in this situation. If Michaels father had a life insurance policy this would allow him to receive funds after his estate is taken care of to continue school. Reference Rejda, G.E. (2008). Principles of risk management and insurance (10th ed.). Boston, MA: Pearson Addison Wesley.