Question 2 (10 Marks)

For each of the following scenarios, identity and explain, what risk management method/technique is used, for handling the potential loss exposure.

a. COZY Hotel rented a party room at the hotel to Little Mermaid Playgroup for Christmas celebrations. The rental agreement specified that Little Mermaid Playgroup, not the COZY Hotel, would be responsible for any liability arising out of the use of the party room. Also, COZY Hotel would be held harmless for any damages.

How was COZY Hotel dealing with the liability exposure/risk in renting the party room to Little Mermaid Playgroup? Explain your answers.

Sources: PF, Kapoor & PRMI, Rejda

Date: 6 October 2021

PAGE 1 OF 3

b. Family Dispensary, with the main business of dispensing medicines and medical aids /supplies, has more than 20 outlets in Hong Kong. Recently, the risk manager found that all the dispensarys inventory of medicines and medical aids /supplies were stored in a single warehouse.

Hence, the risk manager recommended that the inventory be divided among three warehouses to prevent all inventory of medicines and medical aids /supplies from being destroyed by the same loss (e.g. fire).

Splitting the inventory among three warehouses illustrates which risk management technique is used by Family Dispensary? Explain your answers.

c. The production plant for Bonbon Sweet shop is located at an earthquake zone. Although the risk of earthquake is low, the risk manager of Bonbon Sweet shop is concerned that an earthquake could damage the plant and equipment. He obtained earthquake insurance quotations from insurance companies but found that the cost of earthquake insurance cover was too high relative to the risk.

Finally, the risk manager of Bonbon Sweet shop did not purchase any earthquake insurance.

Which risk management technique is Bonbon Sweet shop using with respect to the risk of earthquake? Explain your answers.