Aligning Your Risk Financing with Your Risk Appetite

May 29, 2020

In today’s highly competitive, margin-stressed market, it pays to explore the alternatives to traditional insurance. Too often insurance brokers focus on the risk/reward trade-off between higher retentions and premium savings without any regard to an organization’s ability to absorb risk. This often leads to an inefficient and costly risk financing strategy that can leave an organization under-insured and paying too much in insurance premiums.


The only way an organization can ensure its risk financing strategy is efficient and effective is to fully understand its risk appetite and the volatility of its hazard risk portfolio. Many metrics are used to help quantify an organization’s risk appetite (e.g., a percentage of EPS or cash flow from operations or adverse impacts to certain financial ratios that can potentially trigger a credit rating change). Allocating this tolerable level of risk to the various exposures managed by the organization is critical.   Risk Appetite

The amount of unexpected risk, above and beyond expected loss outcomes, that an organization can absorb and continue to thrive


After defining the risk appetite, an organization must quantify the annual cost of risk for its existing portfolio. This is critical to understanding the expected loss costs and volatility of the portfolio. With a clear understanding, an organization can then design and implement a risk financing strategy that aligns with its risk appetite and goals. Possible strategies include utilizing a captive, altering limits of insurance, blending various lines of coverage in an integrated program, and, in some cases, transferring more risk.


With Beecher Carlson’s extensive experience designing and implementing creative risk-financing strategies, we will work to help you lower your organization’s total cost of risk while managing the volatility of overall financial performance due to adverse loss outcomes. Contact us today to learn more.