Risk Financing

Risk Financing

 

C-Risk provides clients with objective advice on the use of alternative risk financing approaches available to clients who may be interested in augmenting their insurance & risk management programs. These approaches include risk-transfer and risk retention, with risk financing being used primarily as a stop-gap measure to finance the residual risk that sometimes cannot be contained through the use of only conventional insurance with contractual risk-transfer and indemnification methods. Alternative risk financing can include the use of basic methods like large deductibles, and can include more sophisticated methods like using self-insurance mechanisms such as captive insurance, reinsurance, catastrophe bonds (cat bonds) and parametric insurance instruments.

 

Alternative risk financing techniques can also include transferring risks through the application of safety and loss control. An effective method is using contractual risk-transfer and indemnification when applicable. Consideration should always be given to retaining risks which are within a client’s financial capacity and insuring risks which are above a client’s retention capacity. There are other methods that are more exotic like using hedging derivative instruments, and insuring for traditionally insured hazard risks with catastrophe coverages or catastrophe bonds (cat bonds) that can include parametric triggers. These alternative risk financing mechanisms are for extreme cases.

 

Some of these alternative risk financing techniques are used mostly by more sophisticated project owners and construction financial professionals who are well versed in financial analysis with a good understanding of finance, economics, and statistics. These skills are required to be comfortable and proficient with using probabilistic risk analysis as a decision-making tool to manage portfolios of risks.

 

The C-Risk approach to “holistic risk management” is based on a simpler and more fundamental concept. Since most project owners and construction companies must balance a multitude of risks, e.g., contractual, financial, operational, organizational, we recommend that a thorough risk assessment is based on the majority of an organization’s risks. We determined this to be the optimal approach for developing a client-specific risk profile. An organization can use this risk profile as a road-map in order to more effectively manage, control, and mitigate their risk.

 

The use of a captive as a risk financing mechanism to augment the efficiencies of using wrap-up insurance programs (OCIP or CCIP), will require definitive requirements and effective controls. Combining risk financing approaches on large capital construction projects can sometimes provide additional economies if these hybrid risk financing programs are structured properly. These approaches are not used for every project, but they can be used on certain projects to provide project owners with other project-specific options. The bundling of a portfolio of coverages into a risk financing mechanism can have potential benefits, like not having to pay additional costs that are typically factored into rate structures for having four or five monoline policies, each with separate fees and assessments. As an alternative risk financing mechanism or as a method of self-insurance, a captive can be a viable option to clients who are willing to invest the time, money, and effort to structure the right type of captive for their organization or for a project owner on a large megaproject.

 

C-Risk can assist a client to identify, quantify, and control their risks by collaborating with the client, other insurance and financial professionals, or with a client’s insurance broker to design, structure, and implement any variety of alternative risk financing programs. These programs take into consideration that a client, to the maximum extent possible, should attempt to retain their own losses, thus avoiding the additional costs associated with transferring those losses to an insurer. This is the main driver for why many clients explore to use of alternative risk financing as an alternative to purchasing off-the-shelf commercial insurance products.

 

Before exploring alternative risk financing options, it is recommended that a comprehensive insurance coverage review be done in order to determine whether an organization’s current insurance & risk management program is sound before making substantive changes to their program structure.