Determining optimal risk financing

By focusing only on the cost of insurance, companies ignore the opportunity to strike the right balance between transferring risk to an insurer and financing a degree of risk themselves, according to a Marsh report, Managing through the downturn.
Should organizations opt for higher deductibles, thereby retaining more risk and lowering the cost of insurance, it will have more capital available if there are few or no losses in the year, the report notes.
“The process of identifying the optimal risk financing solution will often result in three sets of information: financial, leadership and insurance,” the report notes. “It’s the blend of these considerations or factors that will provide the optimal risk finance design.”
Individually, financial, leadership and insurance optimal results are not sufficient, the report notes. It says blending these three tools allows a business to design the optimal risk finance program.
The byproduct of this will be a strong governance framework, according to the report.
“Risk managers following this process can usually demonstrate a reduction in the total cost of risk (TCOR), enabling their firms to release capital back to the business,” the report notes. “And not just in Year 1, but [on an] ongoing [basis], helping the company reduce volatility in its total cost of risk.”
The full report, which offers advice on how to tackle the key risks companies will face as the global economy slows, can be found at http://www.marsh.co.uk/Media/Managing_Through_the_Downturn.pdf