Art. 21 · What your balance sheet can absorb · 3 min read

The internal pool

If you have decided to carry a layer of risk yourself, carry it like an insurer would: charge yourself the premium, every month, into a separate account.

Raising your excess saves premium. The saving arrives quietly, spread across twelve invoices, and gets absorbed into general trading. Then a loss lands, the money isn't there, and the conclusion drawn is that raising the excess was a mistake.

It wasn't. The mistake was keeping the risk without keeping the premium.

The internal pool fixes this with almost no machinery. Work out what the risk you have retained actually costs, the risk cost from Article 01, and pay that amount into a dedicated account every month, as if it were an invoice. In the years nothing happens, the fund grows. In the year something happens, it pays.

There is a second benefit that is easy to miss: it keeps the cost of risk visible. When the risk is insured, prevention competes with everything else for budget. When you are paying yourself £900 a month for a risk you carry, the £4,000 fix that halves it becomes obvious.

Three honest limits. This only works for the layer you can genuinely absorb. A fund with £30,000 in it does not carry a £2m exposure, and the first serious loss in year two will empty it before it has grown. It needs a real account and a written rule about who can spend it, or it becomes working capital by accident. And it is not insurance: nobody is standing behind it, there is no regulated protection, and you should not describe it internally as though there were.