“Total Cost of Risk” is the sum of the costs arising from all classes of risk faced by an organization. Insurance is one component of a risk management strategic plan that protects your assets. There are many benefits to this new approach.
Benefits of a total cost of risk approach
- Making effective risk management decisions.
- Measuring progress toward risk management objectives.
- Understanding that insurance is only a piece of the puzzle, not the entire puzzle.
Total Cost of Risk
- Internal Risk Administration- This is the cost associated with managing your insurance program. For example, if you have to spend more time getting basic insurance issues answered, your cost of risk goes up.
- Legal and Claims Expenses- These are costs associated with claims. If your agent is not willing to step in and help, you will spend more time managing the process.
- Deductible Costs- Every policy has certain deductibles. These are direct costs. It is always important to check quotes to make sure deductible are consistent. Lower premiums may turn into higher costs if the deductibles are higher.
- Uninsured Loss Costs- Policies do have exclusions and will impact your costs. For example, if you operate a restaurant, your policy better have food spoilage coverage. Knowing the risks of your industry can actually reduce overall cost.
- Safety Program Costs- Safety programs do have a cost. Some are paid internally and some can be supported by the insurance company.
- Insurance Premiums- These are direct insurance costs.
- Contracted Costs- You may enter into contracts for services, and having the right language can improve overall costs. For example, if you are remodeling your building and don’t require the contractor to have insurance, you may be responsible for his injured employees or more. This will increase your risk costs.
The key is there are ways to lower costs in each of these areas that don’t have anything to do with insurance. Having a trusted advisor who can help you evaluate this will serve you well in the long run.