Page 140 - RISK Management IC 86

Risk Management

to set aside, will depend on its size of liquid reserves and
the expected returns from alternative use.

How much an organization can afford to contribute to
the contingency fund or to pay out the insurance premium
directly depends on its net annual cash flow, i.e the surplus
of earnings over costs.

An organization that cannot afford to contribute to a
contingency fund each year, or pay out insurance
premiums, will not be able to sustain in the long run. In
the shorter term, it might sustain depending on certain
judgements and decisions.

E.g, it may concentrate for providing for the risks with
very high potentials and low frequency, or concentrate
for providing for those risks with high probability but of
low potential.

If the annual net cash flow varies from year to year, the
internal funding of risk has an advantage over insurance
as the size of the annual contributions can be varied
accordingly, which is not possible in case of fixed
insurance premiums. Funding also has an advantage over

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