Risk management techniques to provide funding for losses after they have occurred. Some risks are retained and paid out of normal cash flow, reserves or a formal self-insurance scheme, the ultimate of which is a captive insurer. Insu ance is a common external source of finance while non-insurance risk transfer through hold harmless agreements and financial instruments such as weather derivatives also entails external financing. There are numerous alternative risk transfer products that offer a range of solutions, particularly for firms active in the financial and capital markets.

A record of all risks identified during the risk management process. Each risk is described, classified by type and assessed in terms of its potential in terms of severity and probability. The proposed control or responses measures are noted together with details of the ‘risk owner’, i.e. the manager or employee responsible for implementing the control measures and monitoring the risk. The ‘owner’ is given a target date for implementation or other designated action.

From 2004 (Integrated Prudential Sourcebook) firms must have written policies setting out the risks that they face and their strategy for managing and controlling those risks. As a minimum they will need clear policies to cover credit, market, liquidity, operational and group risk and, for insurers, specific risks relating to underwriting, claims provision and claims management. The policies must be endorsed and monitored by the firm’s managing body, e.g. the board.

Launched in 2002 by the Institute of Risk Management, the Association of Insurance and Risk Managers and ALARM, it provides a formalised risk management framework to meet the requirements of working risk managers. The standard is accessible free of charge on the organisations’ respective websites.

A graphical depiction of a select number of risks analysing them in terms of probability and severity. The horizontal axis illustrates the probability of loss, high or low, while the vertical axis plots severity, high impact or low impact, two categories in each case (as in the diagram below) to give four categories. Some models use four impact categories and six probability categories. Obviously high probability/high impact losses cannot be tolerated while low probability/low impact losses can be paid out of cashflow. All risks plotted should be reviewed, controlled and financed.

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.