Risk reduction techniques that spread risks geographically or by line of business to avoid the problems of risk accumulation or overdependence on a particular class of business. The object is to increase the number of mutually independent risks.

Means risk avoidance.

A process to establish risk management priorities by comparing the level of controllability or other criteria. Risk mapping is a useful tool for prioritising risks by placing them on a risk profile and revealing which threats require management time and resources.

An excess of loss reinsurance contract that is limited to property risks. The reinsured is protected within his overall exposure on an individual risk basis, i.e. the limit and the deductible apply to each and every loss on each and every risk.
***
an excess of loss reinsurance applicable to claims arising on individual risks.

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.