Insurance & Risk Management

Running Head: Insurance and Risk Management
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INSURANCE AND RISK MANAGEMENT
Introduction
A sense of security in terms of finances is as essential to any business just as food, clothing and shelter is to people. A business that has economic and financial security is certain that it would be able to meet most of its expenses for smooth operation as well as meets cost that may come as result of risks during operations. However, no matter how confident a company may be it terms of its financial capability, it is impossible to have the surety of meeting all accidents costs. This is because a business is exposed to many forms of risks in its course of operation. The only sure way of gaining that confidence and the longevity of a business is through acquiring an insurance policy.
Present society provides many examples of risks to a business. When the frequency and the intensity of disasters are on the rise, the ability of a business to bring down its vulnerability to the risks gets limited. When such disasters strike a business has to look for an external source of finance to mitigate the effects. This idea of sourcing for funds to mitigate the effect of costs incurred as result of a disaster is what calls for risk financing for a company.
RISK FINACNING
Risk financing basically attempts to mitigate two types of cost i.e. the costs due to losses and costs due to uncertainty. It attempts to alleviate the impact of these costs by structuring the availability of funds to pay claims, aid recovery and enable an organization to maintain financial stability as it moves forward. This can be achieved in various ways by the business. First there is the fully self-insured entity in which a business retains the responsibility and if risks related costs occur, the entity bears the entire cost directly. The other alternative is a fully insured business which directly transfers responsibility from bearing the risk to an insurance company hence trading regular losses to avoid potential of large and irregular losses.
Risk retention and sharing
For self insured-entities the costs of risks is financed through a combination of retention and sharing among a number of such business in an entity. Losses within stated sub limits or above the overall limits of coverage are retained by entity (NJK 2002 ). They share the timing risks associated with a loss. These conventional risks transfer or sharing programs provide for a smooth effect that protects a business from risk of not having sufficient funds on hand at time of loss.
The degree with which risk retention is attractive to a business entity is related to the control that the government can exert over the risk; the level of predictability associated with the risk; and the entity financial capacity to both bear the risk and to withstand variations (NJK, 2002). Before opting for either risk retention and sharing or risk transfer as a method for risk finan...