Higher Losses and More Events Mean It's Time to Consider Establishing a Risk Financing Facility

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When should a company consider establishing a risk financing facility (RFF)?  Being a good lawyer, I would say, "It depends."  But 1.) an increase in the number of individual events, along with 2.) a rise in the total claim amount per event, are two factors that would support a decision to establish and maintain an RFF.  The reason is simple: higher probability of a claim along with a higher claims amount per event means taking control of risk will help to lower the total bill from an event.  And that is exactly what occurs when a company established an RFF.

A recent study from MunichRe indicates the number of events and total amounts per event are rising:

Both overall and insured losses from natural disasters in 2017 were significantly higher than the corresponding averages for the last ten years, which, after adjustment for inflation, amount to US$ 170bn and US$ 49bn respectively. The hurricane season in the North Atlantic proved particularly costly, accounting for US$ 215bn in overall losses, of which US$ 92bn is expected to be insured. There were also two earthquakes in Mexico with a combined loss of over US$ 8bn, and widespread flooding in China which caused losses of more than US$ 6bn. Severe wildfires were raging in the USA until the end of the year. Losses from the October fires alone exceeded US$ 10bn, with the bulk of this amount – more than US$ 8bn – insured. By the end of the year therefore, losses from wildfires are likely to be substantially higher.