Page 59 - RISK Management IC86 Ebook

The Insurance Times

Essentially an organization can finance its risk costs in
the following ways:
l Payment out of current expenses
l Through a funded or unfunded reserve
l By debt or equity financing
l By pre or post-loss credit
l By forming a captive, a trust, by pooling or through a

spread-loss plan.

n The probability and severity of possible losses play an
important part in the structuring of a risk-financing programme.
It is axiomatic that in practice high probability of loss generally
goes hand in hand with relatively low severity and vice versa.

Risk retention

n Where the cost of the potential loss is large, retention would
not be a good alternative, as the individual would not have the
resources available should a loss occur. Here, the cost of the
risk is borne by the individuals themselves.

n It should be explained to clients that the decision to retain risk
ought to be on the basis of being able to afford the financial
consequences of related event occurring, and not on the basis
of being unable to afford suitable cover.

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