Financial Risk Allocation Method

The financial risk allocation method is based on the partial transfer of the method to individual financial transaction partners. At the same time, economic partners are given the part of financial risks of the enterprise, where they have more opportunities to neutralize their negative consequences and have more effective methods of internal insurance protection.

In modern risk management practice, the following main areas of financial risk allocation have become widespread:

• Risk sharing among investment project participants
  In the process of such distribution, the enterprise may transfer to its contractors financial risks related to non-fulfillment of the schedule of construction and installation works, poor quality of these works, theft of construction materials transferred to it by some others. For the enterprise carrying out the transfer of such risks, their neutralization consists in reworking the works at the expense of the contractor, paying them the amounts of penalties and fines and in other forms of compensation for the losses suffered.
• Risk sharing between the enterprise and suppliers of raw materials and materials
  The subject of such distribution is primarily financial risks associated with loss (damage) of property (assets) during their transportation and handling. The forms of risk allocation are governed by the relevant international rules.
• Risk sharing among leasing participants
  Thus, in case of operational leasing, the enterprise transfers to the lessor the risk of moral ageing of the used (leased) asset, the risk of loss of its technical productivity (subject to the established rules of operation) and a number of other types of risks provided for by the corresponding special clauses in the concluded contract.
• Share risk among factoring (forfeiting) participants
  The subject of such distribution is primarily the credit risk of the enterprise, which in its preferred share is transferred to the relevant financial institution - a commercial bank or factoring company. This form of risk allocation is of a paid nature for the enterprise, but makes it possible to substantially neutralize the negative financial consequences of its credit risk.

The extent to which risks are neutralized, and therefore the extent to which their negative financial consequences for an enterprise are neutralized, is the subject of contract negotiations with partners, as reflected in the agreed terms and conditions in the respective contracts.