Alternative Method of Mitigating Risk on Medium and Large Corporations

Abstract

High operating costs and complexity of risks are impacting negatively on corporations’ profitability despite practicing corporate governance. Corporate governance requires that the management develops frameworks, structures and guidance to manage enterprise risk. The traditional methods of mitigating risk has relied heavily on insurance as the only mean of protecting enterprise against risks. This is now becoming too expensive for corporations, and, is not able to cover all risk exposures. This forms the basis of the research problem in this study. The purpose and objective of this study is to establish alternative methods of mitigating risks in corporations and, develop models for computing benefits accruing to the corporations as a result of using the new alternative method. As such, this study identifies financial assets, sinking fund, ploughing back of premiums as possible investments where foregone insurance premiums can be invested and, develop a model for computing earnings resulting from such investments. This study applies Actuarial Theory, Financial Theory of Risk Transfer, Modigliani and Miller Theory and Agency Theory, and use both primary and secondary data collected from National Transport and Safety Authority, Kenya and Registrar of Motor vehicles, Kenya target populations, namely number of countries in Europe and North America and the number of insurance companies in Kenya. This study is of significance to the business communities, scholars and researchers, the government and the general public by: (1), providing a better understanding for designing and formulating risk management policy in their organizations, (2), providing mechanism for investing the foregone insurance premium and (3), strengthening knowledge and further research in this area. In summary this study is tenable and a better alternative to ever increasing insurance premiums.