NAME: ADEJAYAN DAMILOLA TOLU

MATRIC NO: 170207137

DEPARTMENT: INSURANCE

COURSE CODE: INS 321

COURSE TITLE: RISK MANAGEMENT 2

QUESTION
List and Explain 8 Ways of Financing Business Risk
 1. INVESTMENT IN INFORMATION TECHNOLOGY
An effective risk program should provide management with an enhanced ability to continually
capture, evaluate, analyze, and respond to risks arising from changing internal operations,
external markets, or regulations. Not managing these changes effectively can produce financial
losses, negative publicity, and affect the achievement of the organization’s objectives or mission.
Therefore, effective risk programs consider, evaluate, and provide input to an organization’s
planning, performance measuring, and support the evaluation of potentially negative events and
their impacts from changes to an organization’s established risk appetite and tolerance-setting
processes. Also, note that information and communication are essential framework components,
but more importantly, feedback tools.
Having timely information is key to an effective ERM program. Immediately knowing a key
supplier has experienced significant disruptions to a raw materials supply chain, for example,
allows customers to invoke supply chain resiliency plans to quickly secure replacement materials
elsewhere. Without that timely information, a supplier’s disruption might also disrupt its
customer’s manufacturing processes. Management must continually monitor internal operations,
suppliers, related parties, counter-parties, and customers to look for changing circumstances that
must be addressed to reduce the risk of loss.

2. CONTRACTUAL RISK TRANSFER

Contractual risk transfer is when the language in a non-insurance agreement excuses one party
from financial or legal responsibility associated with specified actions, inactions, injuries, or
damages. In contractual risk transfer, one party agrees to indemnify and hold another party
harmless in a contract. The indemnitor, backed by their insurance policy, accepts the liability in
the indemnities’ place.
If risk-related contract stipulations are well written, they can effectively protect indemnitees
from unexpected liability by literally transferring risk to the indemnitor. Of course, it’s not as
easy as it sounds. Some techniques used to achieve contractual risk transfer include:
 Indemnity & Exculpatory Agreements
 Waivers of Subrogation
 Comprehensive Insurance Requirements

The indemnification and hold harmless agreements transfer risk of financial loss from the
indemnitee to the indemnitor, but what happens if the indemnitor does not have the financial
ability to protect the indemnitee? If the contract also includes comprehensive, well-written
insurance requirements and you have collected valid and compliant evidence of insurance—
namely, a certificate of insurance (COI)—you can tender the claim directly to the indemnitor’s
insurance carrier for defense and payment of any damages.

3. SELF INSURANCE
Self-insurance is a method in risk management in which a company or person sets aside a sum of
money so they can use it to mitigate an unexpected loss. By principle, one can self-insure against
any type of damage, such as flood or fire. In reality, most people choose to buy insurance against
potentially significant and unusual losses.
Self-insuring against certain risks may be more affordable than buying third party insurance. The
more gradual and smaller the failure, the greater the likelihood of a person or firm opting to self-
insure themselves.
For example, some renters prefer to take out self-insurance rather than buy renter insurance to
protect their rental properties. If you do not have a mortgage loan and a considerable amount of
assets, you may find life insurance self-insuring.
The theory is that since the insurance company aims at making a profit by paying premiums
above the expected losses, a self-insured person should be able to save money by setting aside
the money in emergency funds, which would have been paid out as insurance premiums. But if
an accident or natural disaster happens, it's important to save enough funds to cover you, your
family, and your belongings.

4. RISK RETENTION
Risk retention is an individual or organization’s decision to take responsibility for a particular
risk it faces, as opposed to transferring the risk over to an insurance company by purchasing
insurance. That means the individual or organization has chosen to pay for any losses out of
pocket rather than purchasing insurance as a means of transferring the financial burden of a loss
to a 3rd party. Companies often retain risks when they believe that the cost of doing so is less
than the cost of fully or partially insuring against it. Shoplifting losses are one example of risks
that many companies choose to retain instead of purchasing or claiming on their crime insurance
policy reason companies may choose to retain a risk is when it is not insurable or falls below
their policy deductible. In this case, it is referred to as “forced retention”. Insurance companies
also have to make a decision about which risks to retain. Risks they choose not to retain are
transferred out via a reinsurance policy.

Risk retention can either be done voluntarily or be forced.

The decision to retain a risk voluntarily usually comes down to an economic calculation. If the
losses happen often enough to be budgeted for or if the premiums for insuring against this risk is
too high, many companies will choose to voluntarily retain the risk. Large organizations such as
railway operators or government bodies may also choose to forgo insurance and retain almost all
of their risk because they are big enough to absorb potential losses. These types of organizations
can save money by not purchasing insurance.

5. HEDGING
Hedging, in finance, is a risk management strategy. It deals with reducing or eliminating the risk
of uncertainty. The aim of this strategy is to restrict the losses that may arise due to unknown
fluctuations in the investment prices and to lock the profits therein. It works on the principle of
offsetting i.e. taking an opposite and equal position in two different markets. In simple terms, it
is hedging one investment by investing in some other investment.
Generally, when people plan to hedge, they try to ensure themselves against a negative event.
This does not prevent the event from occurring, but it surely reduces its impact. Not only
individual investors but portfolio managers and large corporations also use this hedging
technique to minimize the exposure to various types of risks and decrease the negative impact
thereon. Let us understand Hedging by a simple example, you buy a life insurance policy, you
support and secure your family’s future in case of your death or any serious injury in some
accident. Similarly, when you secure your ‘A’ investment’s loss by offsetting it with ‘B’
investment’s profit, it is known as ‘Hedging’.

6. INSURANCE
Insurance helps you to reduce financial losses when unfortunate events occur. For instance, when
there is a breakdown of equipment your company might not be able to function properly and this
might lead to a loss of revenue but you can use a business interruption insurance policy to guide
against this such that the insurance company covers for any losses incurred during the period.
Promotes business continuity
When some companies are hit with sudden unfortunate occurrences, it may lead to the end if not
properly managed but insurance helps to minimize risks so that the business continues to operate
and grow regardless.
Risk sharing
Insurance also helps to achieve risk or loss sharing in business. Such that when a company
makes losses instead of profits, the insurance company can come to the rescue. Also, when
businesses are hit with misfortunes, they may not be able to solely afford the costs of getting
back up and running again but when the business is insured, the risks are shared between the
company and in the insurance company such that both parties can collectively get the business
up and running again.
Protection of business image
When a business goes down, it is not only the business that suffers; the customers, stakeholders,
shareholders and the public are affected too. Therefore, insurance helps to manage bad
occurrences so that customers and every other person attached to the business can be protected.
Protects the business against debtors
Sometimes, debtors also pose risks to the business and insurance can help to protect the business
against defaulters.
Effective use of resources
Insurance also helps to promote and ensure that resources are put to the best use. For instance,
health insurance helps to ensure that employees are of perfect health and happy so that they can
put in their best.
Provides assurance to stakeholders and investors
Also, when a company is insured, it provides a kind of assurance to people who may consider
doing business with them. Insuring your company attracts shareholders and customers to your
business

7. DIVERSIFICATION
Diversification is a risk management technique that mitigates risk by allocating investments
across different financial instruments, industries, and several other categories. The purpose of
this technique is to maximize returns by investing in different areas that would yield higher and
long term returns.
Most experienced investors agree that, although it does not provide any guarantee against loss, it
is the most important component of achieving long-range financial goals while reducing risk.
Investors and fund managers usually diversify their investments across various asset classes and
evaluate what portion of the portfolio to allocate to each. These classes can include:
Stock Market – Publicly traded company’s shares or equity
Bonds – government and corporate fixed-income debt instruments
Real estate and Properties – piece of land, buildings, natural resources, livestock, and water and
mineral deposits
Exchange-traded funds (ETFs) – a collection of securities that follow an index, commodity, or
sector and listed on exchanges
Commodities – Materials that are necessary for the manufacture of other products or services

8. DERIVATIVES
A derivative is a financial instrument with a price that depends on (or is derived from) another
asset. It is typically a contractual agreement between two parties in which one party is obligated
to buy or sell the underlying security and the other has the right to buy or sell the underlying
security.
However, derivatives can take many forms and some—like OTC derivatives—are complex and
mostly traded by professional rather than individual investors. On the other hand, many
derivatives are listed on derivatives exchanges and are standardized in terms of the quantities
traded (size), expiration dates, and exercise (strike) prices.