The function of risk financing is to help companies align the extent to which they are able to tackle financial risks with their willingness to do so. Risk financing is also an integral part of risk management, which allows companies to reach organizational objectives while reducing the level of uncertainty.
Companies typically reserve a certain portion of their capital as a way to combat the effects of risk when engaging in new business endeavors. The process of risk financing evaluates the level of risk and determines the necessary capital that’s proportional to that level. One of the most commonly used metrics that measures the required expenditure with regard to risk mitigation is Cost of Risk, commonly known as COR.