What is total cost of risk?

Total cost of risk is well known to risk managers in large companies but it is a concept that even small business owners should know…as it can save you lots of money!

Total cost of risk is generally defined as, insurance costs + losses + costs of risk management. The goal is to minimize the number.

The philosophy is “what gets measured gets better”. In this case it’s a way of saving you unnecessary expenses. Let’s take a closer look at why you may want to start measuring your total cost of risk.

Let’s examine the components of total cost of risk: insurance costs + losses + costs of risk management.

1. Insurance costs

The first part of total risk cost is the money you pay for insurance.

This cost is relatively easy to calculate, you simply need to add up the insurance bills you pay for all your different types of coverage.

As we’ve discussed in this blog, there are many forms of business insurance. Some of them are mandatory like workers’ comp and auto and some of them just make good sense, such as liability and property coverage.

2. Losses

You could reduce your insurance costs by reducing your insurance coverage but of course there’s a major downside to that. If you have less insurance then you become exposed to big, even huge, potential losses. For example if a company does not have liability insurance they could be sued and be involved in a multi-million dollar claim.

So when risk managers look at the second part of the cost of risk they are looking at projections of what could happen to your business. Projecting these costs obviously becomes complicated, as it’s based on probabilities and benchmarking against other businesses in your industry and geography etc.

The definition of losses here includes direct losses like the deductible on your insurance policies and items that your policy does not cover plus indirect costs, such as loss of productivity or the damage to your brand in the case of an incident.

3. Costs of risk management

Minimizing risks in your business may mean checking equipment or putting working practices in to place to increase safety. This kind of work takes time and has associated cost. This cost is one part of the cost of risk management in your business.

Another part of the cost may be more administrative such as having someone in your finance area think through your total cost of risk and deal with claims or insurance issues that do come up.

Total cost of risk is a concept that may seem foreign to many small business owners, something that only makes sense for large corporations but in fact it is a very practical way of insuring your business makes more money.

Leaving yourself open to large losses from being underinsured or from having a risky working environment is not a sound business approach in the long run. Total cost of risk is a way to quantify the risk situation in your business and take the appropriate action.

If you’d like to discuss the best ways to minimize the cost of risk in your business contact the experienced agents at John B Wright.