RISK FINANCING THROUGH INSURANCE

PRESENTE BY :ANUJ SANDEEP VIKAS

Risk financing
Risk financing is a term used to describe the

consumption of resources that occurs when a company sustains financial losses in the course of conducting business. The financing has to do with securing resources that can be used to offset the losses, allowing the company to manage the losses without negatively impacting the day to day operation of the business. There are several different ways that risk financing is managed, including the establishment of reserves set aside for this type of issue, sharing the risk with a third party, or even obtaining insurance that effectively transfers the risk to an insurance provider.

Risk financing
A risk management tool of financing the loss by

way of 1. Transfer Insurance Non-insurance 2. Retention Captive insurance Self-insurance

 Insurance : A social device in which we contribute

toward the risk management with the contribution of the others in case of the happening of any unexpected event. Captive Insurance: An entity formed primarily to insure or reinsure the business risk of the parent organization. Self insurance: in case of the self insurance the company kept aside the cash reserve on periodic basis to be drawn only in the event of a financial loss resulting from the assumption of pure risk.

DEFINITION OF INSURANCE
In financial term: Insurance is the pooling of fortuitous(not planned or happening by chance) losses by transfer of such risks to insurers, who agree to indemnify insured for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk. In Legal sense: A contract between two parties in which one party in consideration of price paid to him proportionate to the risk provides security to other party that he shall not suffer loss, damage by happening of certain unexpected event.

BASIC CHARACTERISTICS OF INSURANCE

POOLING OF LOSSES
PAYMENT OF FORTUITOUS LOSSES RISK TRANSFER

INDEMNIFICATION

CONTD
POOLING OF LOSSES Pooling is the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss. PAYMENT OF FORTUITOUS LOSSES A fortuitous loss is one that is unforeseen and unexpected and occurs as a result of chance. RISK TRANSFER Risk transfer means that a pure risk is transferred from the insure to the insurer, who typically is in stronger financial position to pay the loss than the insured. INDEMNIFICATION It means that the insured is restored to his or her approximate financial position prior to the occurrence of the loss.

Requirements/Elements of an Insurable Risk

There must be a large number of exposure units. The loss must be accidental and unintentional. The loss must be determinable and measurable. The loss should not be catastrophic. The chance of loss must be calculable. The premium must be economically feasible.

Sources of insurance
Private Insurance: these companies are typically

categorized by ownership and are basically of two types. Stock companies: operated for profit, stockholder do not have policyholder Mutual companies: insurance companies owned by its policy holders. Public insurance: A government agency established at the central or state level to provide specialized insurance protection for individual or organization in the areas such as job loss i.e. unemployment, pension plans(social security), work related injuries(worker compensation) etc.

Types of insurance
Life insurance

Non life insurance

Non-life insurance:
Property insurance: insurance that provide

protection against the financial losses resulting from the interruption of business operation or physical damage to property as a result of the fire, accident, windstorm, theft or other destruction occurrence. E.g. home insurance, business insurance etc. Liability insurance: provide protection against injury or damage claims made by a third party. E.g. automobile insurance, worker compensation etc. Health insurance: insurance designed to provide protection against the illness or injury suffered by the insured. It involves the medical expenses incurred by the insured.

Life insurance
It deals with the risk that is certain- death. The only

difference lies when it will occur. It is a common fringe benefit in most of the companies because it provide protection for the family of the policyholder and is of great importance. It also provide additional source of retirement income for the employee and their family. endowment policy: Insurance that provides coverage for a specified period, after which the face value is refunded to the policyholder. Group life insurance: life insurance for company employees typically written under a single master policy. Key executive insurance: life insurance design to compensate the company/organization for loss of an important executive and to cover the expenses of securing a qualified replacement. Such insurance may prevent the

Insurable risk

PEOPLE RISKS Loss to Employees ILL Health and accident Death Overseas travel

PROPERTY RISKS Damage to Physical Assets Acts of God Accidents Break down

FINANCIAL RISKS Monetary Loss from Loss from Operations Theft and Burglary Product liabilities Business interruption Public liability Bad credit Directors & Officers liabilities LIABILITIES RISKS

Two sides of buying insurance policy

Advantages Firm is indemnified for losses Uncertainty is reduced Insurers may provide other risk management services Premiums are taxdeductible Disadvantages Premiums may be costly Opportunity cost should be considered Negotiation of contracts takes time and effort The risk manager may become lax in exercising loss control.

captive insurance
Self Funded "Savings"
WITHOUT Self-Funding ... "Risk!"

Captive insurance

Self insurance
In which calculated amount of money is set aside to compensate the potential future loss. Self insurance can be a cost effective alternative to the commercial insurer. It may however increase the insolvency risk of the firm as it is solely responsible for all the loses it have retain. Self insurance is probably a better choice for the liability risk than for property risk exposure.

THANK YOU

fidelity bond Bond that protects employers from employees' dishonesty. surety bond Bond that protects people or companies against losses r e s u l t i n g f r o m non-performance of a contract. title insurance Insurance protection for real estate purchasers against losses incurred because of a defect in title to property. credit insurance Insurance to protect lenders against losses caused by insolvency of customers to whom credit has been extended.