Financial Risk Management

---

Managing financial risk has increasingly become the key to commercial viability and a healthy balance sheet. Correctly utilised, Financial Risk Management can put a collar on areas of potential exposure and remove assets or risk transactions from the balance sheet.

In addition to managing risk, Financial Risk Management can also deliver performance benefits which far exceed its cost. By improving the balance sheet, through reduction or removal of risk, it can improve return on assets without incurring a corresponding increase in cost of funds and, in some cases, with a reduction in cost of funds.

The two principal methods of financial risk management are Credit Enhancement and Alternative Risk Transfer (ART). Provided the exposure being considered has a sound financial basis and the objectives of risk transfer are clear, a solution using these methods is generally obtainable.

Credit Enhancement

Credit Enhancement allows an entity to enhance its own credit rating by utilising that of a higher rated insurer.

Credit Enhancement is commonly used for:

• Wrapping securitised assets to obtain a credit rating for issue into the market
• Supporting an organisation's credit rating to maximize its borrowing capacity
• Underpinning a revenue stream to assist in financing or accessing the best funding option

Risk Solutions International has recently arranged Credit Enhancement for organisations in the following areas: Marine, Aviation, Energy, Construction, Agriculture, Mining, Property and Aged Care.

Alternative Risk Transfer (ART)

Not all areas of corporate risk can be transferred to the insurance market using traditional methods. This can often include risk areas of critical importance to a corporation. Alternative Risk Transfer (ART) facilitates this risk transfer by using underwriting capital in non-traditional ways, providing vital solutions to some of the most delicate risk problems faced by corporations. ART is frequently used to develop multi-year transfers.

ART can be used by companies to provide 'contingent capital', which can be used in the case of a capital shortfall caused by factors which make other forms of capital difficult to find, for instance a drop in product demand.

ART is used in many different ways, including:

• Underpinning the number of customers or yield from customers
• Bundling a basket of risks and transferring by way of multi-year managed transfer
• Smoothing fluctuations in raw material prices

Risk Solutions International has recently concluded ART structured transactions for organisations in the following areas: Energy, Agriculture, Hospital and Aged Care.

 

Risk Solutions International sources capital for Credit Enhancement and ART in Australia, Europe and the United States.
Only underwriters with a S&P rating of A or internationally accepted equivalent are used.