Risk financing method which combines some of the features of risk retention and risk transfer. It involves an arrangement to offset one risk by taking a counterbalancing position on another risk. This happens with futures, weather derivatives and weather swaps, which have elements of risk transfer and risk retention.

Part of the risk management process that allocates responsibility at a senior level for managing key risks. The allocation of risk is supported by a mechanism for reporting issues ultimately to the senior person who has overall responsibility for risk management.

The pure premium needed to cover the expected risks but with no allowance for expenses, commission and contingencies. It is the amount of premium required to cover the risk, taking account of the average claim amount and average claim frequency.

Also called yearly premium method it is a form of life reinsurance under which the risks, but not the reserves, are transferred to the reinsurer for a premium that varies each year with the amount at risk and the ages of the life insureds. The cedant retains all investment content.

Analysis of (re)insurer’s business that tabulates risks into bands of similar values, showing the number of risks in each category, average values, aggregate values and aggregate premiums, etc.

Measures introduced into an insured organisation to mitigate the effects of risks that cannot realistically be avoided altogether. Measures vary according to the situation but the installation of burglar alarms, sprinkler leakage systems and implementation of quality control procedures are all examples.
***
Any measure designed to reduce the size of those losses which are not prevented.

Member-owned liability insurance companies. Set up in the US in the face of a ‘hard market’, a number of trade associations or groups of companies combined to form risk retention groups as allowed under the Liability Risk Retention Act 1986. The groups operate as insurance companies limited to writing liability covers for groups with a common interest. RRGS require members to capitalise the company. Many of the groups focus on pollution liability or product liability.
***
A type of liability insurer owned by the policyholders. The members in this type of organization must be in the same type of business, so that they are exposed to the same type of liability risks. The organization spreads liability equally between the members and offers a different way of financing a liability.

Risk assumption techniques.

The amount of risk that an investor, individual or business is willing to assume to achieve a specific goal. Risk tolerance is a function of financial capacity, willingness to take risks and the overall profile of the business or individual. The risk profile can be plotted on a risk map, i.e. a probability/ impact matrix. Financial services professionals need to understand the risk tolerance levels of their clients. See Figure 7.