Risk Finance Simplified

Risk Management

Risk management is the proactive process that protects your company (employees, assets and profits) against both the physical and financial consequences of risk. The process involves assessing and evaluating your risk, planning, co-ordinating and directing your risk control activities and implementing risk-financing strategies.

Risk Control

Risk control involves the physical or practical steps that are taken to reduce the likelihood of things going wrong. For instance, this could involve measures such as emergency planning, provision for health and safety, security for IT systems and quality control on products. Risk control is an essential part of risk management but it falls outside the scope of risk finance.

Risk Financing

Hollard Risk Capital makes financial provision in advance for losses that might occur in the future. For example, you might implement a self insurance programme to cater for "uninsurable" risk exposures.

Retention

If your loss is not insured it’s retained. In other words you will have to cover the cost internally, either with existing company assets such as, your cash flow, cash reserves or selling some equity to raise the funds that you need.

External Financing

External Financing is when you go to 'outside' sources to raise the funds that you need to cover losses. Here you have the choice of raising funds in advance (pre-loss) for possible future needs, or raising the exact amount that you need after the loss has occurred (post-loss).

Pre-loss

This is where you raise money in advance for possible future losses. Pre-loss measures include a range of ways in which funds can be raised or possible losses can be insured against. These fall mainly into the following categories; captive insurance and capital markets.

Captive Insurance

Captive insurance is a key mechanism of risk financing for large companies. There are three types of ‘captives’:

• Captive insurance company is where you establish your own risk insurance company wholly dedicated (therefore ‘captive’) to your own business.
• Cell captive is where you purchase a shareholding in a risk insurance company. Your share is called a ‘cell’ and can be used to raise finance to cover your risk exposure.
• Rent-a-captive (or contingency policy) is when you enter into a contract with an underwriting company and you "rent" the license to underwrite your risk

Commercial Insurance

Commercial insurance is an external instrument that can be used to raise money for possible future losses.

State Risk Financing

State risk financing is an external instrument that can be used to raise money for possible future losses

Capital Markets

Raising funds via financial trading on the capital markets is another mechanism you can use to raise risk finance. A risk finance fund manager recommends a diversified portfolio of short-term investments that can supplement your risk finance products

Post-loss

If you don’t have funds available when a loss occurs, then the measures that you take to raise that money after the event fall into the category of post-loss financing. These can include any number of financing facilities from loan funding to short-term financial trading on the capital markets.

Financing Facilities

Financing facilities are loans or investments that are used to cover the cost of a loss that has already happened.

Cash flow, reserves, provisions and equity

Cash flow, reserves, provisions and equity are all internal resources that can be used to cover the cost of your losses.