Financing risks consumes resources of the organization. For example, the specialist company's risk management will have to spend some time to develop, implement and manage risk financing plans. Various risk carriers (bearer of risk) and service providers, including insurance companies, prescribed rates for their services at a level sufficient to cover their overhead costs (costs of the proceedings) and profit. Override the benefits of the development and implementation of the financing plan risks these costs?
Risk financing plan is needed for different categories of companies, especially for small and medium business, for which the weight loss will inevitably lead to a halt or bankruptcy of the organization. Also, non-profit organizations like the Red Cross, have to fund their losses in order to remain solvent and to ensure the provision of necessary public services.
But how is the situation at the companies whose shares are traded on the open market? Do they have to expend the resources necessary to develop and implement a plan of financing risks (formal Risk Financing Plan) ! In theory, shareholders can diversify the risk of loss associated with ownership of shares of a company ( unsystematic risk ), independently by its inclusion in the portfolio of assets (acquisition) of shares of enterprises of different types. Will shareholders and the economy as a whole to function better if the company whose shares are traded on the open market, will not divert resources to finance the risks?
Many of the companies whose shares are traded on the open market, adhere to a conservative approach to risk financing. In many cases, the management of these companies believe in the fact that it can maximize the market value of the shares of the company, demonstrating to investors in their reports steadily growing income and stable cash flow. Management of the company transfers the risk of occurrence of losses so as to stabilize the reported earnings in order to maximize the market value of the company. Conservative approach to financing risk management can also be explained by the desire of management to receive compensation. Often, management receives additional financial compensation for a steady increase in the market value of the company.
For organizations economic feasibility transfer their risks is the emergence of the process-related special benefits. Avoid bankruptcy protects the owners of the company and other shareholders of the additional costs, such as attorneys' fees and court costs arising in the course of doing business due to bankruptcy. If the company is subject to a progressive tax, the reporting of sustainable income subject to taxation, allows to save on taxes in time rather than a demonstration of unstable income. Another economic factor - the emergence of the companies additional incentives to the implementation of various investment projects in the case of transfer to third parties mostly associated risks.
Bob Hedges (Bob Hedges), professor emeritus at Temple University (Temple University), in one of his works in 1964 made the following comments regarding the transfer of risk:
"There are critical values. When the damage exceeds these values, negative consequences occur. Hence the principle of fair conclusion "significant losses" (large Loss Principle) : the effect of minor damage is limited to damage itself. Therefore, the use of insurance payments can be quite clearly defined amount received dollars. If the underwriter knows his stuff, it can not be expected that this number will regularly exceed the premium collected. However, if direct damage causes deterioration of assets - enough to cause damage to the financial integrity of the business, then get insurance compensation benefits for the company are not limited to the amount actually received dollars. Benefits may be so great that reach the value of the business. "
The key to a successful program is the allocation of risk financing sufficient resources for its implementation in order to maximize the benefits of the excess over cost. In the next chapter will be studied in more detail issues related to the benefits and costs of financing programs risks.
