The risk management process has to be managed because to completely eliminate risk is cost prohibitive and if the process is dominated by risk averse individuals that will translate to higher costs as the default mechanism is to purchase insurance.
These are losses the firm elects to retain rather than transfer. These would be low severity, high frequency claims. In short, it is the organization using its own internal funds or funds from within the enterprise to finance the losses. Examples include the losses paid under an advise-to-pay arrangement for short term disability, dental and vision claims with low benefit limits and losses under the specific deductible amount within an ASO arrangement.
This is the process of of reducing the likelihood or the size of an unexpected loss without engaging in risk transfer. Examples of this include pre-authorization and utilization review (controlling the cost of services by eliminating unnecessary utilization), case management (where outcomes based treatment patterns or alternative settings of care are proposed), value based insurance design (enhance benefit to improve prescription drug compliance and avoid unnecessary hospital admissions) and targeted conditions, outcomes based wellness.
The process of transferring the adverse impacts of a risk to a third party. Examples include stop loss reinsurance (see the example) where losses that exceed a certain dollar threshold on an individual or an aggregate basis are limited. This includes insurance, reinsurance, HMO's and non-insurance transfers as well, such as, contractual/eligibility provisions.