Why is this Topic Important to Financial Professionals? All businesses, as well as individuals face some risk, and that form can vary greatly. Knowledge and identification of certain risks can help position clients in better risk management positions as apposed to ignoring them.
Risks can generally be divided into two sub-classifications; traditional and non-traditional. Traditional risks are those typically covered by traditional insurance companies such as life insurance or forms of casualty insurance. However, non-traditional risks are those which are conventionally uninsurable or prohibitively expensive to cover through traditional means.
What are some of the elements that are attributable to traditional insurance?
- Common underwriting standards (for example actuarial tables can accurately predict the insurance expense over time in relation to a large group of individuals).
- Common risk factors in market segment (everyone is faced with death, so the market to solicit this form of insurance is much more prevalent than say insuring an allowance for bad debt account).
- Standard contract terms are assigned (generally terms are not negotiable except premium and some investment risk).
What are some examples of non-traditional risk underwriting?
- Self-Insurance, this is when the business retains the risk by not shifting it to a third party and/or other insurance arrangement.
- Insurance on an actor’s ability to continue acting, or likewise, a sports star who has insured his body caused by physical injury during the season or career.
- Insuring business operations from financial loss caused by, say, a terrorism event or natural disaster.
Why would a business or individual consider alternative risk transfer?
Take for example the actor, who, lets say, is expected to star in a big film. The production company may purchase a life-insurance policy, which may or may not contain traditional terms, to cover the risk of loss from the death of the actor before the movie is completed. If the production company does not purchase a life-insurance policy, or similar product, the production company will be said to have self-insured the risk of loss caused by the death of the actor, if it were to occur before the completion of the production of the movie.
On the other hand, assuming the production company did purchase some life policy on the actor, insuring his life for a short period of time, until the completion of the movie, the production company has shifted that risk to a third party insurance company who bears the risk of loss — the stated benefit minus premiums paid, generally.
Assume the actor lives throughout the entire production; however the actor, for artistic reasons (which may or may not be allowed in the contract negotiated between the parties) does not want to continue and/or complete the acting portion of the film after working with a few of the co-stars for a couple of days. Not only has the production company incurred significant costs associated with pre-production and whatever filming time has accrued, but the production company will most likely want to find a new actor to take the part, an additional expense causing delay costs to increase.
The production company, is similarly, self-insuring the risk that the actor will complete the film without walking off the set. Self-insurance is generally defined as: “insuring [risk] by setting aside money to cover possible losses rather than by purchasing an insurance policy.” 
Here the risk has been identified as the financial loss from the actor walking off the set. The production company will pay, out-of-pocket, the cost associated with the film until production continues with a new actor.
The example above is just one risk the production company could be exposed to during production of the film. A complete risk analysis will identify and discuss most known risks and have some financial plan regarding the occurrence of those risks.
 “Self-Insurance”. Princeton University. WordNet 3.0 http://wordnetweb.princeton.edu/perl/webwn?s=self-insurance. Last Accessed 8/25/2010.