After assessing the frequency and severity of the risk, the Risk Manager will quantify the level of all the costs which can be absorbed by the organization without any significant influence on the organization. It is also the duty of the risk manager to identify the potential sources from where to fund the large losses. It should also be assessed that how can those funds be arranged at the time they are needed. For financing a risk there are many options which includes Risk Management, Self funding, transferring the financial loss to another organization, transferring the responsibilities to a professional risk carrier and combination of the entire above options can also be used.
One of the risks financing option is to invest the funds and resources to remove the risk or try to reduce down the impact of any risk incidents or in easy words one option of risk financing is Risk Management. The cost involved may be in setting a separate department of risk management or the cost may be involved in revising the whole production process or the cost involved may be to have more than one independent supplier so the risk of failure of one supplier would not affect the organization.
Self Funding is another option for financing a risk. The organization may decide that some risks are such that they can be easily funded with in the resources of the organization. For self funding the organizations will create reserves for any unforeseen and unpredictable event. Some times, such an incident occurs that can not be managed by the organization, for such circumstances other funding options can be taken.
Transfer the financial loss to another organization. This can usually occur when there are mergers and acquisitions. In mergers and acquisition, one party may wishes that some losses to remained with previous shareholders or previous stake holders.
Transferring the responsibility to a professional risk carrier is another risk financing option. Insurance is one of the common forms to transfer the risk. Insurance is defined as transfer of a risk from one entity to another, in exchange for a payment known as premium. The insurance companies can further take their insurance which is known as Reinsurance.
We can’t say that any one financing option will be valuable for all risks. Different risks need different financing options. Most commonly, a manageable part of risk is retained by the organization itself and the remaining part is transferred to insurance companies.