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Principles of Risk Management and Insurance, 13th Edition by Michael McNamara, George E. Rejda

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Insurance Market Dynamics

Chapter 3 discussed the various methods of dealing with risk. When property and liability loss exposures are not eliminated through risk avoidance, losses that occur must be financed in some way. The risk manager must choose between two methods of funding losses: risk retention and risk transfer. Retained losses can be paid out of current earnings, from loss reserves, by borrowing, or through a captive insurance company. Risk transfer shifts the burden of paying for losses to another party, most often a property and liability insurance company. Decisions about whether to retain risks or to transfer them are influenced by conditions in the insurance marketplace. Three important and interrelated factors influencing the ...

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