Abstract
The prime purpose of this paper is to explain the concept of risk capital and advocate for its implementation in the management of non-financial companies. The paper is kept in the discursive tone, as the problem is new, and it first requires to establish the conceptual framework for further empirical considerations. With reference to the origins of the concept of risk capital (related to its understanding in financial institutions), the paper discusses the utility of risk capital for the management of risk in non-financial companies, with the recognition of the sustainable dimension of risk capital. The discussion is framed within the corporate finance approach. In the applicative dimension, the paper identifies the universe of the sources of risk capital and proposes a taxonomy of these sources. It considers both the well-established traditional sources, as well as the state-of-the-art solutions that are in the early stages of their adoption for the needs of corporate end-users. The conclusions address the possible areas of tensions and of the inclusion of risk capital in the decision-making process, as well as the areas of further empirical research within.
Highlights
Contemporary companies operate in the unprecedented dynamics of the environment, facing the challenges and threats imposed by the variety of endogenous and exogenous factors
The innovative sources of risk capital embrace the state-of-the-art solutions from the corporate end-users’ point of view. These solutions are often well established in the practice of insurance and reinsurance sector or on financial markets but are relatively rare in corporate risk management. These sources embrace a group of so-called Alternative Risk Transfer solutions that are distinguished by a tailor-made and multi-year approach in their design [72,73,74]
Captive could be considered as a source of risk capital, as it is related to the injection of funds in the case of risk occurrence—the funds that are obtained through a sophisticated mechanism that combines retention and insurance risk transfer (The types of captives and a detailed analysis of the related benefits and costs is provided in [81,82,83])
Summary
Contemporary companies operate in the unprecedented dynamics of the environment, facing the challenges and threats imposed by the variety of endogenous and exogenous factors. The discussion is framed within the corporate finance assumptions: The paper refers to a company’s ability to sustain the negative outcomes of risk, measurable by unforeseen and undesired cash flow volatility In this regard, the primary purpose of this paper is to explain the concept of risk capital and advocate for its implementation in the management of risk of non-financial companies. The alternative sources of risk capital are scarcely discussed in the context of their applicability to non-financial companies (or corporate end-users) In this regard, this paper contributes to the popularization of the new, alternative solutions that have recently become implementable in corporate risk management strategies. Sustainability 2019, 11, 894 provides conclusions and final remarks, as addressed to the possible areas of tensions and limitations of risk capital implementation and the possible design of further empirical investigations
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