Risk Financing
Risk Financing
Risk imposes costs in two broad forms – loss costs and the costs of uncertainty. Risk financing attempts to mitigate the impact of these costs by structuring the availability of funds to pay claims, aid recovery and enable the organization to maintain financial stability as it moves forward towards its mission. How risk financing occurs can vary. At one end of the scale, fully self-insured entities retain responsibility and, if risk-related costs arise, the entity directly bears those costs. At the other, fully-insured entities transfer the direct responsibility for bearing risk to an insurance company, trading regular losses (the premiums paid) to avoid the potential of large and irregular losses (claims payments). CIS’ pooling programs occupy a middle ground. They enable entities to retain losses up to some pre-determined level; then to share the cost of losses within a mid-layer, and then to transfer risk above the pooled layer by securing reinsurance up to available limits. In reality, most local governments finance the cost of risk through a combination of retention, sharing and transfer. By design or default, a local government entity’s risk-financing portfolio will almost always contain a self-financed component. Losses within stated sub-limits or above the overall limits of coverage are retained by the entity. They may also choose to retain lower levels of risk. For example, members in current CIS pools reduce their contribution levels by using various deductible levels, from $1,000 to $125,000, to pay the first part of some or all losses. In reality, what is being shared or transferred is the timing risk associated with a loss. Most conventional risk transfer (insurance) or risk sharing (pooling) programs provide a smoothing effect that protects an entity from the risk of not having sufficient funds on hand at the time a loss occurs. When risk financing occurs – before, during or after resources are needed - is another variable. Guaranteed
Risk imposes costs in two broad forms – loss costs and the costs of uncertainty. Risk financing attempts to mitigate the impact of these costs by structuring the availability of funds to pay claims, aid recovery and enable the organization to maintain financial stability as it moves forward towards its mission. How risk financing occurs can vary. At one end of the scale, fully self-insured entities retain responsibility and, if risk-related costs arise, the entity directly bears those costs. At the other, fully-insured entities transfer the direct responsibility for bearing risk to an insurance company, trading regular losses (the premiums paid) to avoid the potential of large and irregular losses (claims payments). CIS’ pooling programs occupy a middle ground. They enable entities to retain losses up to some pre-determined level; then to share the cost of losses within a mid-layer, and then to transfer risk above the pooled layer by securing reinsurance up to available limits. In reality, most local governments finance the cost of risk through a combination of retention, sharing and transfer. By design or default, a local government entity’s risk-financing portfolio will almost always contain a self-financed component. Losses within stated sub-limits or above the overall limits of coverage are retained by the entity. They may also choose to retain lower levels of risk. For example, members in current CIS pools reduce their contribution levels by using various deductible levels, from $1,000 to $125,000, to pay the first part of some or all losses. In reality, what is being shared or transferred is the timing risk associated with a loss. Most conventional risk transfer (insurance) or risk sharing (pooling) programs provide a smoothing effect that protects an entity from the risk of not having sufficient funds on hand at the time a loss occurs. When risk financing occurs – before, during or after resources are needed - is another variable. Guaranteed