Risk Financing
What the exam tests
Risk Financing tests how losses are funded after control. Expect questions on retention, insurance, deductibles, self-insured retentions, captives, pools, limits, aggregates, and cost-of-risk comparisons.
Core rules
- Retention is planned or unplanned. Planned retention is budgeted through deductibles, self-insured retentions, or captives. Unplanned retention is the uninsured gap.
- Transfer can be contractual or insurance-based. Insurance transfers defined losses in exchange for premium, subject to exclusions, limits, deductibles, and conditions.
- A deductible is paid by the insured and typically reduces the loss payment; a self-insured retention is a stated amount the insured pays before the insurer responds and may carry conditions such as claims-handling duties.
- Captives, risk retention groups, and pools are alternatives for organizations with predictable, fundable retention. They still need reinsurance and governance.
- Cost of risk includes premium, retained losses, administration, and risk control. Compare total cost, not premium alone.
- Check per-occurrence limits, aggregates, sublimits, coinsurance, and claims-made versus occurrence triggers.
Worked example
A contractor can buy a $1,000 deductible policy for $60,000 or a $10,000 deductible policy for $52,000. The premium saving is $8,000. Expected losses in the $1,000–$10,000 layer are $6,000 annually, but one severe claim could fill the layer. If the contractor has $50,000 of liquid reserves and stable loss history, the higher deductible may be rational: it saves $8,000 against $6,000 expected retained loss and keeps cash available. If reserves are thin or losses are volatile, the lower deductible is safer even though premium is higher.
Traps that cost marks
- Comparing premium only and ignoring retained losses.
- Treating a deductible and a self-insured retention as identical.
- Forgetting aggregate limits and sublimits when evaluating coverage.
- Assuming a captive or pool eliminates risk rather than financing it.
Key points
- Retention can be planned or unplanned; unplanned retention is the dangerous gap.
- Deductibles and SIRs differ in mechanics and conditions.
- Compare total cost of risk, not premium alone.