Risk management policies set boundaries for the operations of an organization. Doing so can effectively reduce the amount of risk to which the entity is exposed, thereby cutting the size and severity of certain expenditures. The policies can cover such topics as:
- Limits on the amount of financial risk that will be assumed
- Limits on the financial guarantees that will be provided to third parties
- Limits on the amount of self-insurance that will be allowed without reinsurance
- The minimum credit rating of insurance providers
- Limits on the use of captive insurance companies
The following is an example of a risk management policy:
- The company may only acquire insurance from organization with an A.M. Best rating no lower than A-.
- The corporate umbrella policy will cover all losses exceeding $100,000.
- Captive insurance companies may only provide a maximum of 10% of the company's insurance needs.
- The minimum amount of D&O insurance shall be $4 million.
- The minimum of general liability insurance shall be $15 million.
- The amount of commercial property insurance must match the replacement cost of all structures, equipment, and inventory.
- The amount of business interruption insurance shall be sufficient for at least three months of company operations.
The preceding policy is designed to keep from buying insurance from a financially weak carrier, avoid self-insuring the bulk of all risks, and ensure that certain minimum amounts of insurance coverage are purchased. The end result of this policy should be a considerable reduction in the amount of risk to which an entity is subjected.