So, what is Risk Financing in simple terms?

This is a bit of a mouthful. It is a tax efficient means to pre-fund legitimate, known and unknown (reasonably predictable) business liabilities. These may, or may not, be normally insurable (or viable) in the traditional Short-term or Long-term markets.
This means you allocate business funds to a suitable, secure, financial service provider as a business expense and claim them back as losses arise in your business. These funds will generate bonuses too, if unused, which is quite handy as we go into a higher interest environment. There are VAT and corporate tax considerations when all types of transactions occur, of course. The taxman will give you tax deferral, not a tax holiday.

What are the names of these types of arrangements?

Types of Alternative Risk Transfer (ART).

1. Risk Financing Policy
2. Rent A Captive
3. Cell Captive

NB. The same principles apply to all ART types above, although the captives are geared for higher volumes of business.

This looks like traditional insurance, how is it different?

In a nutshell, you pay for your own losses and no one else’s. So think long and hard if you have a poor loss record; would you like to pay for some or all of your claims?

Would you like to discuss this further? Contact us at paulb@artrisk.co.za or paulb@pobox.co.uk or call +27 (0) 83 708 3634.