Managing the cost of risk means minimizing administrative risk control and risk financing expenses in an attempt to increase profits.

The level of cash flow variability that an organization is willing to accept is highest for organizations that prefer to avoid risk.

For most organizations borrowing is the only available method of increasing liquidity to pay for retained losses.

The acceptable cash flow variability level for an organization depends on factors such as its size and financial strength.

Is impacted by the risk appetite of its stakeholders.

Is typically quite easy to determine.

Is independent of the organization's risk tolerance.

Is highest for organizations with low risk tolerance.

Liquidity can be increased by using cash flow to fund capital projects.

Real property and machinery are examples of liquid assets.

Liquid assets offer higher returns than other longer-term investments.

As an organization's retention level increases so does the level of liquidity required.

Risk transfer measures tend to increase the variability of cash flow making an organization less attractive to investors.

Most risk transfer measures limit the potential loss amounts being transferred.

Risk transfers shift the transferor's legal responsibility for paying a loss to the transferee.

The majority of risk transfer measures are pure transfers.

Incentives for risk control

Timing of cash flows

Cost savings

Control of claims process

Provide ancillary services.

Reduce exposure to large losses.

Allow the organization to maintain control of the claims process.

Provide the organization with incentive for risk control.

Borrowed funds

Current expensing of losses

An unfunded reserve

A funded reserve

Using a funded reserve

Current expensing of losses

Borrowing funds

Using an unfunded reserve

There are often disputes about whether a loss falls within the transfer agreement's scope.

Risk transfer measures are usually a combination of retention and transfer.

The ultimate responsibility for paying for loss remains with the transferor in a risk transfer agreement.

Most risk transfer measures involve some type of limitation on the potential loss amount being transferred.

An auto physical damage deductible

Losses that represent a large proportion of the organization's cash flows

Litigated liability claims

Losses with a relatively high expected value

Less exposure to large loss

Less cash flow variability

Timing of cash flows

Avoiding adverse public relations

Current expensing of losses

Using an unfunded reserve

Using a funded reserve

Borrowing funds

Maintaining control of the claims process

Reducing cash flow variability

Avoiding adverse employee relations

The ancillary services provided

Reduction in exposure to large loss.

Transference of responsibility for claims administration.

Reduction in cash flow variability.

Incentive for risk control.

Transfer increases the level of liquidity that an organization requires.

Transfer is less effective than retention in managing cash flow variability.

The primary benefit of transfer is that it allows an organization to manage its cost of risk.

The primary benefit of transfer is certainty regarding the ability to pay losses.