4 ways to reduce your total cost of risk

  • Many organisations miss opportunities to reduce their risk expenditure, by focussing predominantly on risk transfer procurement
  • Understanding the dynamics between four particular areas of opportunity is key to achieving sustainable financial savings
  • We explain how to take a broader approach to reduce your total cost of risk

While insurance-related expenditure can seem a simple place to make savings when trying to reduce outgoings, focussing solely on risk transfer costs can actually lead to greater expense for organisations.

Traditional approaches tend to take a procurement-based view, focussing predominantly on aspects such as insurance premiums, cover and claims handling.

But, while these highly visible aspects are important, they only represent a small proportion of the Total Cost of Risk (TCOR) an organisation faces.

80/20 vision

Insurable risks make up just 20% of an average organisation’s TCOR. By focussing on this 20% when costing a policy, organisations often miss some of the greatest opportunities to reduce risk expenditure, saving on procurement costs today, only to increase their TCOR in the long-term.

Effectively identifying and managing the ‘hidden’ 80% of the risk could help your organisation establish more effective strategies to achieve sustainable financial savings.

We take a look at how your organisation can approach risk from a broader perspective – helping achieve more sustainable cost savings in the longer term –by identifying just four areas of opportunity to reduce your TCOR.

1. Major incidents

Major incidents facing modern organisations are not just those affecting tangible assets – such as fire or flood – but also those that threaten intangible assets, such as information and reputation.

Major incidents may happen infrequently, but their potential for significant financial impact makes them an essential consideration when seeking to reduce TCOR.

Catastrophes can arise from a diverse set of circumstances, from human error to cyber security breaches, and can have an array of associated costs. As organisations continue to outsource more of their functions, catastrophe risk is also becoming more complex, less visible, and therefore more important than ever to understand.

Integrating business continuity planning into your risk management activity will enable you to anticipate and plan for such events, helping you to:

  • Identify and understand a broader range of potential threats
  • Better manage the risks associated with suppliers and partners
  • Improve incident response times and understand the cost implications of delays
  • Reduce recovery periods and organisational disruption
  • Improve claims history and its impact on future premiums

Business continuity planning is an important step towards maximising the three opportunities to reduce TCOR that we will discuss next, as it will help to properly inform decision-making.

2. Intangible risks and indirect cost

Not all risk-related costs are immediately visible on a profit and loss account. There is a broad spectrum of risks that can result in secondary costs to an organisation and its stakeholders.

For example, a major incident could cause reputational damage, resulting in:

  • Loss of customers/stakeholder confidence
  • Additional management/employee time to protect the organisation’s reputation
  • Media expenses
  • Legal fees
  • Loss of productivity as resources are diverted elsewhere

3. Retained risks

The vast majority of risks are either uninsurable or more cost-effective for organisations to self-insure, with the average organisation’s TCOR estimated to be 10 times greater than their actual spend on insurance premiums.

Recognising this, and a taking a broader view of how to approach cost mitigation, is key to achieving real financial savings.

It is important to identify the most mission-critical risks with the highest potential impact. You can then prioritise building greater resilience in those areas, allowing you to manage both the probability of events occurring and their potential impact.

Your insurer too, can make a big difference in assisting you manage these retained costs but do you fully understand the level of support provided, both within the premium paid, and also the additional support that can be bought in?

4. Risk transfer

Although insurance premiums represent a small proportion of an organisation’s TCOR, as predictable annual costs, they are important to manage effectively.

However, doing so requires a comprehensive approach to risk that goes beyond the procurement process itself.

Assessing the risk appetite and resilience of different areas of your organisation is an important first step to reducing risk transfer costs.

For example, you may discover that it is more cost-effective to self-insure certain elements, or that alternative mechanisms, such as captives, offer a more efficient way to transfer risk.

Business continuity planning and resilience building (highlighted in point one above) is a fundamental step to achieving sustainable reductions in risk transfer costs.

Put simply, well-managed risk will cost your organisation less in the long term. Effective risk management reduces losses, makes your risk more attractive to insurers, improves claims history and consequently reduces premiums.