risk financing through insurance

7/30/2019 Risk Financing Through Insurance

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Risk financing

Risk financing is a term used to describe theconsumption of resources that occurs when a

company sustains financial losses in the course

of conducting business. The financing has to do

with securing resources that can be used to offsetthe losses, allowing the company to manage the

losses without negatively impacting the day to

day operation of the business. There are several

different ways that risk financing is managed,including the establishment of reserves set aside

for this type of issue, sharing the risk with a third

party, or even obtaining insurance that effectively

transfers the risk to an insurance provider.


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Risk financing

A risk management tool of financing the loss byway of

1. Transfer

Insurance

Non-insurance

2. Retention

Captive insurance

Self-insurance


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Insurance : A social device in which we contribute

toward the risk management with the contribution ofthe others in case of the happening of any

unexpected event.

Captive Insurance: An entity formed primarily to

insure or reinsure the business risk of the parentorganization.

Self insurance: in case of the self insurance the

company kept aside the cash reserve on periodic

basis to be drawn only in the event of a financial lossresulting from the assumption of pure risk.


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DEFINITION OF INSURANCE

In financial term: Insurance is the pooling of fortuitous(not planned

or happening by chance) losses by transfer ofsuch risks to insurers, who agree to indemnify

insured for such losses, to provide otherpecuniary benefits on their occurrence, or torender services connected with the risk.

In Legal sense:

A contract between two parties in which one partyin consideration of price paid to him proportionateto the risk provides security to other party that heshall not suffer loss, damage by happening ofcertain unexpected event.


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BASIC CHARACTERISTICS OF

INSURANCE

POOLING OF LOSSES

PAYMENT OF FORTUITOUS LOSSES

RISK TRANSFER INDEMNIFICATION


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CONTD

POOLING OF LOSSESPooling is the spreading of losses incurred by the fewover the entire group, so that in the process, average lossis substituted for actual loss.

PAYMENT OF FORTUITOUS LOSSES

A fortuitous loss is one that is unforeseen andunexpected and occurs as a result of chance.

RISK TRANSFER

Risk transfer means that a pure risk is transferred from

the insure to the insurer, who typically is in strongerfinancial position to pay the loss than the insured.

INDEMNIFICATION

It means that the insured is restored to his or her

approximate financial position prior to the occurrence ofthe loss.


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Requirements/Elements of an

Insurable Risk

There must be a large number of exposure units.

The loss must be accidental and unintentional.

The loss must be determinable and measurable.

The loss should not be catastrophic.

The chance of loss must be calculable.

The premium must be economically feasible.


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Sources of insurance

Private Insurance: these companies are typicallycategorized by ownership and are basically of two

types.

Stock companies: operated for profit, stockholder do

not have policyholderMutual companies: insurance companies owned by its

policy holders.

Public insurance: A government agency established

at the central or state level to provide specializedinsurance protection for individual or organization in the

areas such as job loss i.e. unemployment, pension

plans(social security),

work related injuries(worker compensation) etc.


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Types of insurance

Life insurance

Non life insurance


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Non-life insurance:

Property insurance: insurance that provideprotection against the financial losses resulting fromthe interruption of business operation or physicaldamage to property as a result of the fire, accident,

windstorm, theft or other destruction occurrence. E.g.home insurance, business insurance etc.

Liability insurance: provide protection againstinjury or damage claims made by a third party. E.g.automobile insurance, worker compensation etc.

Health insurance: insurance designed to provideprotection against the illness or injury suffered by theinsured. It involves the medical expenses incurred bythe insured.


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Life insurance

It deals with the risk that is certain- death. The only

difference lies when it will occur. It is a common fringe

benefit in most of the companies because it provide

protection for the family of the policyholder and is of great

importance. It also provide additional source of retirement

income for the employee and their family. endowment policy: Insurance that provides coverage for a

specified period, after which the face value is refunded to the

policyholder.

Group life insurance: life insurance for companyemployees typically written under a single master policy.

Key executive insurance: life insurance design to

compensate the company/organization for loss of an

important executive and to cover the expenses of securing aualified re lacement. Such insurance ma revent the


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Insurable risk

PEOPLE RISKS

Loss to Employees

ILL Health and accident

Death

Overseas travel

LIABILITIES RISKS

Loss from Operations

Product liabilities Public liability

Directors & Officers liabilities

PROPERTY RISKS

Damage to Physical Assets

Acts of God

Accidents

Break down

FINANCIAL RISKS

Monetary Loss from

Theft and Burglary

Business interruption

Bad credit


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Two sides of buying insurance policy

Advantages

Firm is indemnified for

losses

Uncertainty is

reduced

Insurers may provide

other risk

management services

Premiums are tax-

deductible

Disadvantages

Premiums may be

costly

Opportunity cost

should be

considered

Negotiation of

contracts takes time

and effort

The risk manager

may become lax in

exercising loss

control.


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captive insurance

Self Funded "Savings"

WITHOUT

Self-Funding ... "Risk!"


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Captive insurance


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Self insurance

In which calculated amount of money is set aside tocompensate the potential future loss.

Self insurance can be a cost effective alternative to the

commercial insurer. It may however increase the

insolvency risk of the firm as it is solely responsible

for all the loses it have retain.

Self insurance is probably a better choice for the

liability risk than for property risk exposure.


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THANK YOU


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fidelity bond

Bond that protects employers from employees' dishonesty.

surety bondBond that protects people or companies against losses

r e s u l t i n g f r o m non-performance of a contract.

title insurance

Insurance protection for real estate purchasers againstlosses incurred because of a defect in title to property.

credit insurance

Insurance to protect lenders against losses caused by

insolvency of customers to whom credit has been

extended.

risk financing through insurance

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