RISK APPETITE
Once the financial tolerance is established, a business aligns the retention to its risk appetite – best described as its willingness to retain risk. There is often a challenge in achieving consensus between group and branch operations – the risk appetite of the group is often larger than that of branch operations.

This applies in particular in a decentralized company where key management performance measures are based on financial performance. In the event of an insurable loss that isn’t insured impacting profits, a group may wish to consider changing its performance metrics to encourage participation in group insurance programmes that offer better terms. If not, branch operations will very often buy a branch policy that invariably costs more and may not be effective.

RISK RETENTION STRATEGIES
Once a business has established its risk tolerance and appetite, then it considers the way in which risk across the business is funded. A core strategy of many large international companies is to use a captive a wholly owned regulated insurance company established by the group to insure its own risk. There are more than 6,000 captives globally, representing some US$100bn in premium volumes.

In a simplistic sense, a captive involves a business setting aside risk capital in a ring fenced legal entity often in domiciles such as Bermuda, the Caymans, Vermont in the US, Guernsey, Luxembourg and Ireland. These vehicles collect insurance premiums from subsidiaries and reimburse them in the event of loss. One of the main attractions in setting up a captive is that it gives a group greater control of its risk and insurance cost. A captive insurer can also directly access global reinsurance markets where availability and premium price can be more beneficial.

Finally
A corporate insurance programme consists of many types of insurance: employee medical, trade credit, property and general liability. On a consolidated basis the total cost of an insurance programme adds up. A widely cited statistic is that corporate insurance represents between 0.05% and 1% of a business’s revenues. Translated to the bottom line, for a business with a margin of 15%, this represents potential earnings volatility of 3% to 7% – an amount that muchsenior Management will wish to understand and control.
By establishing the direct and indirect costs of insurance, a business can begin to build a picture of its insurance environment. By understanding the various components of insurance programme design, the business can develop a strategy that identifies cost savings, which in turn leads to greater shareholder value.

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.

Business Insurance is the authoritative news and information source for executives concerned about risk and the impact on their business. With information for risk managers, benefits managers, insurers, brokers and other providers of insurance products and services, Business Insurance delivers in-depth analysis on new and emerging risks , therefore Insurance business providing financial protection for property, life, health, etc, against specified contingencies, such as death, loss, or damage, and involving payment of regular premiums in return for a policy guaranteeing such protection.

Dada Suraju Adefolami, Professor of Finance, School of Business Administration. UNEM University, Costa Rica, is a Finance / management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]: 08052043855