Generally, the goal of risk management is value maximization for a for-profit firm. In other words, risk management aspires to maximize value by reducing the price tag on risk. Total costs of real risk include costs of control and costs of funding. This essay targets risk financing. You can find two broad methods of risk funding: risk retention and risk copy. Risk transfer includes insurance and other contractual risk exchanges. At the start of the assay, I will introduce the concept of retention, insurance, and contractual risk transfers, and their benefits and drawbacks. Then I will discuss how a firm should make a decision between risk retention and risk transfer, if a captive insurance provider is not to be employed. Finally, I am going to discuss how a firm, getting a captive insurer, should financing its clean risk loss.
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