insurance to cover the costs, while larger or catastrophic losses are covered by external insurance providers. Deductibles: XYZ Construction Company specializes in high-rise construction projects. Due to the nature of their work, they face the risk of accidents and worker injuries on construction sites. XYZ sets up a captive insurance company and establishes a deductible for worker injury claims. The deductible is set at a level that the company feels comfortable self-insuring, covering smaller worker injury claims in-house. If an accident occurs and a worker sustains a minor injury that falls within the deductible amount, XYZ Construction Company will handle the claim internally. The captive insurer's coverage kicks in for worker injuries exceeding the deductible, providing additional financial protection. Excess Coverage: PQR Construction Company secures a major contract to build a large commercial complex. Recognizing the potential financial impact of construction defects, delays, and liability claims, PQR establishes a captive insurance company. The construction company secures primary insurance coverage from external insurers for general liability and construction risks. However, they utilize the captive insurer to provide excess coverage beyond the limits of the primary policies. This excess coverage protects PQR Construction Company against larger or catastrophic losses resulting from construction-related incidents, such as significant property damage, structural failures, or third-party claims. The excess coverage provided by the captive insurer acts as an additional layer of financial protection, enabling PQR to better manage and transfer substantial risks associated with their construction projects. In these scenarios, the use of captive insurance retention, deductibles, and excess coverage allows companies to tailor their risk management strategies to their specific needs. They retain control over certain risks, manage smaller claims internally, and transfer larger or catastrophic risks to their captive insurer, providing financial protection and enhancing their overall risk management capabilities. 2.6 Risk Distribution/Sharing Risk distribution/sharing is an essential concept in insurance that involves spreading the financial burden of potential losses among multiple entities or individuals. It aims to reduce the impact of risk on any single party by pooling resources and sharing the costs associated with potential claims. Risk distribution/sharing and risk shifting are two approaches commonly employed in the insurance industry to manage and mitigate risk, although they differ in their fundamental principles. Risk distribution/sharing involves the pooling of risks among multiple insured parties within a common insurance pool or marketplace. In this approach, each participant contributes premiums based on their exposure to risk, and in return, they share the collective responsibility for losses that occur within the pool. The objective is to distribute the financial impact of losses across a broader group, reducing the individual burden on any single insured party. The key similarity between risk distribution/sharing and risk shifting is that both approaches aim to manage risk and protect against potential losses. However, the main difference lies in the allocation of risk and responsibility.
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