12.6 Risk financing Flashcards
What is retained risk financing?
Treating, tolerating or terminating the effects of a loss event with the aid of risk financing tools.
(i.e. NOT transferring)
What is the difference between funded and unfunded risk financing?
Funded - allocating a pot of funds BEFORE a loss has to be financed.
Unfunded - no putting funding in place before an event, and relying on current cash / unallocated capital.
When would funding retained risk financing be needed?
When risk transfer such as insurance is not needed or unavailable.
When might unfunded risk financing occur?
4 scenarios
1 Where the loss event had not been pre-identified
2 Where the effects were not understood
3 Where risk transfer fails (e.g. insurer doesn’t pay)
4 Financial evenrts are small enough not to need funding.
Classify “allocated reserves” as a financing tool as funded/unfunded and pre/post loss.
Funded, Both
Classify “cash flows” as a financing tool as funded/unfunded and pre/post loss.
Unfunded, Both
Classify “mutual funds” as a financing tool as funded/unfunded and pre/post loss.
Funded, pre-loss
What is securitisation?
The practice of grouping risky assets into an investment vehicle for sale to third parties. (e.g. selling debt)
What is insurance risk transfer?
Purchasing insurance froma company to indemnify against a range of potential loss events.
List 2 common types of insurance.
Motor Buildings and property Employer's liability Professional indemnity Fraud Business interruption
What is the role of an insurance broker?
To act as an intermediary, to secure the best deal ad design an insurance program, and process claims.
Why is it rare for an organisation to purchase full indemnity insurance?
Due to prohibitively high cost
What is a deductible in insurance?
A fixed amount that the organisation must pay when an loss event occurs
List 3 non-conventional risk transfer tools (i.e. alternative to insurance).
Derivatives (and hedging) Finite risk insurance Protected cell captive insurance companies Catastrophe bonds Credit default swaps
What is hedging?
An investment to reduce the risk of adverse price movements in an asset.
