Risk financing

Risk financing is the technique through which an organization manages the financial impact of risks. It covers how a loss will be paid for if a risk materializes, whether by absorbing it, sharing it or passing it to someone else. The CanadaBuys Buyer's Guide presents it as part of procurement planning under liability and risk management.

Insurance is the most commonly known form of risk financing, but it is not the only one. In Canadian federal contracting, the term comes from the Government of Canada's wider risk-management and liability-management framework. Canada generally self-underwrites the risks for which the Crown is responsible, while contractors are expected to finance losses arising from risks under their control.

Retention, sharing and transfer: the three risk-financing options

The federal Supply Manual identifies three risk-financing options:

• Risk retention (self-insurance): the organization absorbs losses itself.
• Risk sharing: the organization and another party share the financial exposure, including through deductibles or pooling.
• Risk transfer: financial responsibility moves to an insurer or another contracting party, most commonly through insurance.

The Supply Manual also states that risk financing should be considered after the necessary risk-control measures have been taken. Controlling a risk comes first, and deciding how to pay for what remains comes second. It identifies insurance as the most commonly used risk-financing technique.

How Canada finances its own risks

Canada's default approach is to self-underwrite its own risks. The CanadaBuys guidance explains that the federal government has the authority and capacity to raise funds to pay for losses. For that reason, a federal buyer does not normally buy insurance to cover the Crown's own exposure.

How contractors finance the risks they control

Contractors are responsible for financing risks under their control. Most do this by obtaining commercial insurance through insurers and brokers. CanadaBuys identifies three contractor risk-financing models:

• insurance transfer
• self-insured retention
• alternative risk financing

Which model fits depends on the risk and on what the contract requires.

Three insurance arrangements used in federal contracts

Canada uses three contracting options for insurance, each allocating responsibility differently:

• Government-specified insurance: Canada self-underwrites its own risks but specifies the types of insurance and the minimum coverage limits the contractor must maintain.
• Contractor-controlled insurance: Canada self-underwrites its own risks and leaves the contractor to determine the appropriate insurance requirements.
• Government-controlled insurance: for projects involving multiple parties, Canada may purchase and control the insurance to obtain economies of scale.

What risk financing means for a supplier bidding on Canadian public contracts

Start by identifying which risks your business controls, because those are the risks you must finance. Then determine which arrangement the solicitation uses: government-specified, contractor-controlled or government-controlled insurance. Obtain any required insurance or bonding, and maintain the required limits and deductibles. Where the solicitation or contract asks for evidence of coverage, provide it.

The exact evidence and coverage requirements are set in each solicitation or contract, so read the insurance clauses before you price the bid. Confirm early with your broker that your current program meets the stated minimums, so that coverage does not delay contract award.