Considered with this basic premise in mind, the concept of integrated risk financing is relatively simple. Investment theory explains how investors who merely diversify holdings can increase returns without increasing the risk factor. This is widely demonstrated in mutual funds.

A companys spectrum of risks responds in a similar fashion. The probability of all of a companys risks resulting in adverse events at the same time is extremely low. Hence an entire portfolio of risks can be priced more favorably.

Put another way, the combination of noncorrelated risks, viewed over time, decreases the volatility of a company's risk profile and makes it more predictable. If a company has a more predictable portfolio, it can raise specific retentions and save on risk transfer costs, while benefiting from aggregate protection that is triggered once the companys risk tolerance level is surpassed.

Integrated risk financing programs are structured and priced to take advantage of the efficiencies that arise from diversificationthe decreased volatility that comes when risks are combined into a single basket and spread over time. The result is an efficient blend of retained and transferred risk that results in a lower total cost of risk to the organization.

While each integrated program is unique, there are certain characteristics that are common to most:

A single, aggregate limit.

Rather than requiring the insured to purchase separate coverage limits on a transactional basis, an integrated program can be structured with a single aggregate limit that applies to the companys entire portfolio of risk.

A multi-year term.

Integrated programs typically extend over a three-year term. This gives the insured the ability to stabilize costs over a longer time period and enhances the predictability of insurance costs.

Managing a multitude of risks.

Integrated risk financing programs typically encompass at least three coverages.

Basket aggregate protection.

Earnings volatility can be minimized by locking in the total amount of loss the insured could face in any given time period.

While some integrated structures are highly complex, others can be as simple as a single policy that indemnifies a corporation for risks that are traditionally insured, such as property, casualty and management liability exposures. Cost efficiencies can be increased by integrating additional risks, such as product recall or patent infringement coverage.

There are also benefits to be gained from these structures, such as transparency. Companies can demonstrate a “holistic” approach to managing exposures efficiently and strategically. Cost stability is another benefit. Companies can typically secure a guaranteed rate and capacity for up to three years.

Earnings are protected. By providing aggregate protection, an integrated program enables a company to “lock in” the amount of loss that can affect its income statement over a given period.

Also, capacity is stabilized. Since integrated risk programs draw on a substantial amount of net capacity, they are not as exposed to reinsurance recoverability issues or reactionary underwriting. Each program is engineered based on the clients inherent risks.

Companies can use integrated platforms to manage currently uninsured or underinsured risks and possibly gain significant tax and accounting efficiencies. Integrated solutions can also manage business and financial risks, enabling a company to free up capital for strategic investments.

Current market conditions have made integrated risk programs especially appealing to numerous companies, yet many carriers are reluctant to commit to long-term contracts–a key component of these structures–and are therefore retreating from the marketplace. A few insurers, however, are underscoring their commitment to integrated risk financing structures in the firming environment.

Valerie Butt is a senior vice president for Zurich Corporate Solutions in Chicago.

Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.