THE CATHOLIC UNIVERSITY OF EASTERN AFRICA

FACULTY OF LAW

DIPLOMA IN LAW

COURSE TITLE: INSURANCE LAW

NAME:BARLIN LUKALISHI MUTEYO

LECTURER NAME: ESTHER MUCHIRI

ADMISSION NUMBER:1052060

COURSE CODE: DCLS 085

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It would be futile to practice insurance without understanding the vital aspect of risk
management .Critically discuss risk management from different sources and explain the
risk management process.
Risk is the potential of loss or undesirable outcome resulting from a given action activity and or
inaction whether foreseen or unforeseen. Risk is defined in Insurance terms as the probability of
loss or other unfortunate events that hold the capability to interrupt the business objective and
require the benefit of the Insurance claim.
Risk management is the process of finding probable threats in advance,researching them and
taking safety measures to mitigate this threat.It involves identifying assessing,prioritizing risks
followed by coordinated and economical application of resources to minimize monitor and
control the probabilities or impact of unfortunate events or to maximize the realization of
opportunities.The main aim of risk management is to find the possible risks before they create
havoc in the system and strategize to handle them in advance for negating the impact on your
business objective.
Insurance is a tool that you can utilize for risk management.Insurance is a valuable risk
financing tool.Few organizations have the reservses or funds necessary to take on the risk
themselves and pay loss .Purchasing insurance however is not risk management .A thorough and
thoughtful risk management plan is the commitment to prevent harm .Risk management also
addresses many risks that are not insurable ,including brand integrity ,potential loss of
tax ,exempt status for volunteer groups ,public goodwill and donor support.
Insurance is a key aspect in risk management process due to its invaluable benefits like:
Enhanced status:In the situation of looking for financial backup with effective
investment ,having insurance will enhance the value of the business to a significant extent.It will
help the business owner look more responsible and get you the expected financial reguirement
easily.
Enhanced liability:Insurance will safeguard the business owners from financial losses due to
any surprise events or risks.This includes diverse types of risks related to their
employees ,equipment such as an injury to someone while operating the the equipment related to
your business operations .You can be ready for any kind of event and take your business towards
a bright future.
Safeguarding from financial loss: Businesses can be impacted by several factors like theft,
natural disasters, or accidents . Insurance can be a crucial aspect in avoiding financial losses due
to such threats. This could be helpful for both small businesses that may find it extremely

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difficult to make the loss from theft or even a small device that was important for the
proceedings. Surprising events can cause huge losses to businesses and completely block them
without any previous warnings .Even though you may think of purchasing insurance as a
minimal extra cost , it can add great value to any type of business.It can successfully negate the
damage caused to the company which may otherwise lead to stopping its operations completely.
The purpose of risk management is to eliminate or reduce as much as possible ,the losses
resulting from a particular risk.The strategies used include transferring the risk to another
party,avoiding the risk,reducing the negative effect of the risk, and accepting some or all the
consequences of a particular risk.Risk management is broader than insurance in that it deals with
both insurable and uninsurable risks as well as other appropriate noninsurance techniques of
dealing with both types of risks.Risk management therefore also involves techniques other than
insurance.
Classification of risks
Risks can be classified into ;
1. Financial and non financial risks .
A financial risk is one where the outcome can be measured into moneytaryterms and
where it is possible to place some value to the outcome .Measurement in personal injury
may be done by court where damages are awarded or negotiation among lawyers and
insurers.There are cases where measurement is not possible,for example ,choice of a new
car,selection of a career ,choice of marriage partner ,all this are non-financial risks but in
business we are concerned with financial risks.
2. Pure and speculative risks .
Pure risks involve a loss or at a best breake even situation.The outcome can only be be
unfavourable to us of leave us in the same position as we enjoyed before the event
occurred ,for example,car accident ,fire,theft..
Speculative risk is where there is a chance of gain ,for example investing money in
shares(The investment may resukt in a loss or a break even but the reason it was made
was the prospect of gain.),pricing of products ,marketing decisions ,decisions on
diversification,expansionor acquisition providing credit credit to customers among
others.Speculative risks are generally not insurable though the trend is changing though
dynamic.
3. Fundamental and particular risks
Are those that arise from causes outside the control of any one individual or even a group
of individuals.The effect of fundamental risks is felt by large numbers of people,for
example,earthquakes,flood,famine,volcanos,war..Particular risks are much more personal
in their cause and effect ,for example,fire ,theft.All this risks arise from individual causes
and affect individuals in their consequences,risks however change classification mostly

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 from particular to fundamental ,e.g,unemployment. In the main particular risks are
insurable while fundamental risks are not.
4. Dynamic and static risk

The risk management process typically involves the following steps:

1. Risk identification.
The objective of risk identification is to identify all risks facing the organization not limited to
insurable or those experienced in the past.For risk identification to be successful there must be
two essentials: the task of risk identification must be someone's job ,Good management on its
own is not enough to identify a risk it must be someone's job..The tools of risk identification
must be available to the person to identify the risk,this includes organization charts ,
checklists,physical inspections, hazard indices, flow charts, hazard and operability,studies, and
fault trees.
2. Risk analysis
Once risks have been identified,then steps have to be taken to measure the potential impact of the
risk on the organization which entails statistical analysis,for example,data gathering, analysis of
experience,experience, frequency and severity. While carrying out analysis one should consider,
loss experience which must be assessed in terms of their impact on the organization,identifying
the layers of losses.They should also consider express losses or potential losses in a way to be
easily understood by the users ,for example injury cost expressed as lost profit.Risk analysis
basically involves evaluating the likelihood and potential impact of identified risks to them based
on their significance.
3. Prioritize the risk
After analyzing the risk , prioritization begins.Rank each risk by factoring in both its possibility
of happening and its potential impact on the project.This step gives you a comprehensive view of
the project at hand and pinpoints where the teams focus should lie.It will help you identify useful
solutions for each risk.This way theproject itself is not interrupted in significant ways during the
treatment stage.
Insurance is a tool that you can utilize for risk management.
Treat the Risk
After prioritizing the risks, dispatch your treatment plan. While you can’t expect every risk, you
should have set up the previous steps for the success of your risk management process. Starting
with the highest priority risk first, task your team with either solving or at least reducing the risk
so that it’s no longer a risk to the project.

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Effectively treating and moderating the risk also means using your team's resources properly
without hindering the project in the meantime. As time goes on and you develop a larger
database of past projects and their risk logs, you can expect potential risks for a more proactiv
Treat the Risk
After prioritizing the risks, dispatch your treatment plan. While you can’t expect every risk, you
should have set up the previous steps for the success of your risk management process. Starting
with the highest priority risk first, task your team with either solving or at least reducing the risk
so that it’s no longer a risk to the project.
Effectively treating and moderating the risk also means using your team's resources properly
without hindering the project in the meantime. As time goes on and you develop a larger
database of past projects and their risk logs, you can expect potential risks for a more proactiv
Treat the Risk
After prioritizing the risks, dispatch your treatment plan. While you can’t expect every risk, you
should have set up the previous steps for the success of your risk management process. Starting
with the highest priority risk first, task your team with either solving or at least reducing the risk
so that it’s no longer a risk to the project.
Effectively treating and moderating the risk also means using your team's resources
4. Treat the risk
After prioritizing your risk ,dispatch your treatment plan .Starting with the highest priority risk
first task your team with either solving or at least reducing the risk so that its no longer a risk to
the project.This means using your teams resources properly without hindering the project.
5. Monitor the risk
Transparent communication is crucial for the ongoing monitoring of the potential threats .
6.Risk Control
It is a strategy that focuses on minimizing the risk of loss to which an organization is exposed.
The emphasis is on economic control .Unrealistic expenditure is not justifiable in risk
management.Risk control can be exercised in three different ways ,this include:
Reduction; These are the steps taken to ensure that the risk is as low as we can possibly make
it .Reduction can take place either before or after the event has taken place.Risk reduction
consists of all techniques that are designed to reduce the likelihood of loss or the potential
severity or impact of such losses should they occur.Efforts to reduce the likelihood of loss are
referred to as loss prevention ,while efforts to reduce the severity are referred to as loss control.

Consideration of risk reduction :

i. Reduction of likehood of loss can be done through putting up of signs such as no
smoking sign on a petrol station or installing protective devices around machinery to

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 reduce the number of injuries to emloyees .This will reduce frequency of loss or their
probability.
ii. Reduction of severity of impact of loss.This can be done or demonstrated by installing
sprinkler or five extinguished or separations and dispersions of the company assets to
different location in an effort to salvage company assets in case of loss.
iii. Engineering approach to loss prevention .This approach focuses on removal of hazard ,it
focuses on system analysis and mechanical unavoidable,for example ,air bugs can boost
safety belts in vehicles.
iv. Human behaviour approach on loss prevention.It focuses on elimination of unsafe acts by
the person,this approach is based on the fact that most accidents are as a result of human
failure ,for example,alcohol and drug consumption among others.
v. Timing of risk reduction measures,such measures may be designed for prior to the loss
event ,during the loss event and after the loss events .Measures prior to loss include;
 Training of personnel -measures before
 Measures during five
 Fastening seat belts
Measures after the event may be;
 Rush victim to hospital
 Offer first aid

Retention: Once a risk has been identified and reduced as far as possible ,for those within the
pound swapping layer they should be retained .But care must be exercised not to expose the
company to intolerable levels of loss nor spend money on unjustifiable insurance.However in
some cases retention is involuntary ,for example,where there is no cover or cost of premium is
prohibitive.
This is the most common method of dealing with risks whereby organization and individual face
unlimited number of risks most of which nothing can be done about .
Risk retention can either be concious (intentional) or unconscious (unintentional).It can also be
voluntary or involuntary or even be funded or unfounded .When nothing can be done about a
particular exposure then the risk is retained .It is in last resort on risk management starategy
whereby the risk cannot be avoided ,reduced or transferred .The self assumption of risks consists
of waiting for the event to happen with no effort to any financial provision in advance for the
occurrence of risk.In some instances the individual subjected to the risk may provide some
amount in advance to cover for the anticipated financial consequences of the risk normally
referred to as self-insurance.The main disadvantage of using insurance reserve is that ;
i. The amount set aside may be more or less at the time when the risk occurs.
ii. A loss may occur before the fund is sufficient to meet the risk .
iii. There are chances that this fund may be mismanaged or misused by the firm.

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Self assurance is normally possible where there is a large number of risks and more of them have
a large number of value .This objects are distributed such that the possibility of the risk
occurring to all of them at the same time is minimall .As a general rule the risk that are retained
are those that need small losses.
Classes of risk retention;
i. Unintentional risk which occurs when a risk is not recognized so that an individual or
organization may unknowingly or unwillingly retain the risk or loss.
ii. Voluntary retention results from a decision to retain risk rather than avoid or transfer the
risk.Sometimes ,it will occur when a risk manager purchases insurance that does not
cover fully the risk exposure.
iii. Involuntary retention occurs when its not possible to avoid or reduce or transfer an
exposure to an insurance company.It occurs when its not possible to transfer ,refer or
avoid risks of loss such as death or earthquake.
iv. Funded retention is where an organization sets side assets that are held in liquid or semi-
liquid,to cater for the risks or loss.Such risks are usually accepted or retained by the
entity.
v. Unfunded retention is a case where there are no budgeted allocations to meet uninsured
losses.
Advantages of retention

 Increase cash flow- Cash flow may be increased, since the firm can use funds that
normally would be held by the insurer.
 Encourages loss prevention since the exposure is retained there may be greater
incentives for for loss prevention.
 Lower expenses .The services provided by the insurer can be provided by a firm at
a lower cost.
 Saves money since in the long run if the actual losses are less than the loss
allowance in the insurer’s premium.
Disadvantages of retention

 Possible higher losses .The losses retained by the firm may be greater than the loss
allowance in the in the insurance premium.
 Possible higher expense .Expenses may actually be higher.
 Possible higher taxes .Income taxes may also be higher as the premiums paid to the
insurer are income tax deductibles.
Prohibitive; This is transfer to some other parties. This can be through an ordinary contract, for
example, tenancy agreement where the tenant meets any cost of repair after loss. Transfer can
also be by insurance which is a risk transfer mechanism where one exchanges uncertainty for
certainty.
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Risk transfer is the shifting of the risk burden from one party to another. This can be done
through several ways;
a) Through risk allocation where there is sharing of the risk burden with other parties. This
is usually based o a business decision when a client realizes that the cost of doing a
project is too large and needs to spread the economic risk with another firm. Also, when a
client lacks a specific competency that is a requirement of the contract, for example,
design capability for a design-build project. A Typical example of using a risk allocation
strategy is in the formation of a joint venture.
b) Through the purchase of insurance. Whereby in consideration of a specific
payment(premium)by one party the second party contracts to indemnify the first party
against specified loss that may or may not occur up to a certain limit.
c) Subcontracting whereby if an employee accepts work for which they are not fully
competent without the assistance of others they can subcontract the extra work. Extra
work would involve specialist work which that employee lacks the knowledge to handle
or which would involve an excessive amount of work beyond the capability of the
employee.
d) Through the use of contract indemnification provisions.
e) Leasing and renting.

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