Once organisations decide on the optimal balance for retaining and transferring risk, they need to choose the most appropriate risk financing instrument.

Choices such as insurance, derivatives and captives all have strengths and weaknesses and may not be available, affordable, or may bring additional risks such as basis risk or credit risk.

Critical questions you need to consider

• Have you assessed your corporate attitude to risk - your risk tolerance?

• Do you have a risk financing strategy?

• Do you use a Cost of Risk metric to assess the appropriateness of a risk financing programme?

• Have you considered the value of insurance to mitigate corporate earnings volatility?

• Have you considered risk finance as a third form of capital alongside debt and equity?