Cost of Risk

What is a Company’s Cost of Risk?

How do you know if your risk management and insurance program are being optimized?  An industry calculation known as Cost of Risk can help you understand and quantify the financial impact of your current traditional program or evaluate changes you make to such program.  This measurement can also afford you an opportunity to compare your cost of risk to others within your industry.  Within this increasingly competitive insurance market, benchmarking the total cost of risk provides risk managers a key advantage as they design and evaluate their organizations’ risk financing programs.

Cost of Risk is the aggregation of costs incurred by the operating company relating to their risk management program.  These costs include:

  • Insurance premiums paid to a third-party insurer;
  • All retained or uncovered losses paid by the company, including:
    • Deductibles, co-payments, coinsurance;
    • Uninsured losses (insurance wasn’t purchased to cover loss);
    • Underinsured losses (sufficient coverage wasn’t purchased to fully protect the company);
  • Costs associated with safety or loss mitigation programs;
  • Taxes;
  • Risk financing costs; and
  • Other risk management costs.

To provide a comparison within and between industries one can divide those costs by revenue to identify an amount or percentage.  That then affords a more level playing field, especially within an industry so that appropriate comparisons can be made.  This calculation is often made per $1,000 of revenue.

Manage Your Exposures

Approximately 25% of businesses that sustain a major catastrophe are no longer in business within a year’s time.  Risk management and protecting your organization is not about just buying an insurance policy, but about developing a strategic action plan, execution of that plan, and fully committing to the monitoring and support of those initiatives.  In a dynamic business environment, risks and exposures change.  Therefore, continual monitoring of the programs in place is essential, as well as future business expansions, will help to dictate the course of your risk management program. 

Knowing your costs and managing them in relation to your competition is one key element of any successful risk management program.  A micro captive insurance program will effectively facilitate lowering your cost of risk

What is a Company’s Cost of risk and How is it Measured?

Direct costs

  • Insurance Premiums
  • Retained Losses (Deductibles, Claims paid “out of pocket”, Coinsurance, Depreciation, Inadequate Limit, ACV vs. RC)
  • Outsourced Loss Control – Risk Saftey

Indirect Cost

  • Opportunity cost for payment of losses “out of pocket”.
  • Indemnification or hold harmless agreements or uninsured sub-contractors.
  • Other indirect factors that impact the “cost of risk”.