Risk Management Costs Dove 5% in 2016

The main drivers were drops of 12% in the cost of covering property risks; 6% for workers’ compensation; and 5% for liability.
David KatzApril 21, 2017

With the insurance industry glutted with capital, corporations were among those benefiting from the oversupply by paying lower prices for property-casualty coverage in 2016, according to the Risk and Insurance Management Society’s annual benchmark study.  

The main drivers of a 5% overall decline in risk-related expenses were a 12% drop in the cost of covering property exposures; of 6% for workers’ compensation; and of 5% for liability, according to the study. The only area in which risk managers saw rising  costs was to cover fidelity, surety, and crime losses.

Regarding property-casualty insurance markets for 2017, the authors of the RIMS study defer to Well’s Fargo’s January Insurance Market Outlook, which predicts more moderate declines in insurance premiums. For instance, prices in property, primary general liability, and workers’ compensation lines should range from flat to 10% decreases this year, according to Wells Fargo.

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Last year, however, corporations and other types of organizations enjoyed sharp reductions in the cost of covering their risk exposures. After falling 2%, to $10.55 per $1,000 of revenue in 2015, the total cost of risk (TCOR) reached a three-year nadir of $10.07 in 2016, according to the survey. (TCOR is calculated by adding three corporate costs — insurance, retained losses, and risk management department overhead — and dividing by 1,000.)

Perhaps paradoxically, the authors of the RIMS survey note that a key driver of the declines in insurance premiums last year was the financial health of the property-casualty insurance industry. Noting that the industry ended 2016 with its average capital and surplus at a 10-year high, they suggest that all those dollars represent an oversupply. And like most oversupplies, the commercial insurance industry glut has pushed prices down.

All that excess capacity to underwrite risk “is expected to continue exerting downward pressure on rates,” according to the survey. That pressure will persist as long as “insurers compete with new and existing players for market share in an overcapitalized environment and a slowly growing economy.”

With insurance so cheaply available, CFOs appear to have inferred that their organizations were less in need of risk managers to haggle over prices with insurers. Organizations slashed their total risk management department costs by 11% in 2014, 13% in 2015, and 7% last year, according to the survey, which found that the average size of a risk management staff was six.

The comparative annual percentages on the RIMS survey, which is produced with risk management data provider Advisen, are derived from a database of more than 20,000 insurance policies from 759 organizations, according to RIMS. For the 2016 findings, 553 of those organizations contributed data.

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