Risk Management

Cost of Mitigating Risk Fell Last Year, Survey Says

Study shows that per-unit outlays for risk management dropped in 2000. Don't expect a repeat next year, however.
David KatzDecember 12, 2001

Those were the days—or so it seems. Just last year, the overall cost of managing property-casualty insurance risk for U.S. and Canadian companies dropped to its lowest point in over a decade, a newly released benchmark survey says. Things should be a bit different this year–to put it mildly.

But in 2000, the per-unit cost of risk—the sum of a company’s outlays for insurance, retained losses, and risk management administration and services, fell to $4.83 per $1,000 of revenue. That’s down from $5.20 in 1999, according to the survey done by the Risk and Insurance Management Society (RIMS) and Ernst & Young. The 1999 figure itself represented a 10-year low.

This decline in risk-financing costs will come to a screeching halt this year, however. The huge losses associated with 9/11—total loss estimates have ranged as high as $70 billion— will almost certainly drive risk management costs up in 2002. Indeed, the RIMS research indicates that risk management markets were already starting to tighten last year. Sue Anne Mitro, a risk manager for The Hillman Company who worked on the study, notes some corporations reported rate increases and increasing premiums for all major lines last year.

Further, while senior financial executives were enjoying a comforting downhill slide in overall insurance premiums and property and workers’ compensation losses, overall liability costs spiked 19 percent in the U.S, according to the study.

In fact, a change in the study sample–which included risk management executives at 837 organizations in the United States and Canada–actually waters down the evidence that there was a steep decline in the expense of funding corporate risk in 2000. Indeed, researchers for the study concede that more big companies were part of the sample. For instance, eight U.S. organizations with more than $50 billion in revenues were included, up from only two in 1999. Typically, larger companies have more bargaining power with insurers, and thus, have lower costs of risk management.

Among the survey’s other findings: more corporates are turning to enterprise risk management (ERM), which generally means managing and funding a company’s operational and business risks in a coordinated way. Twenty-six percent of the survey respondents installed an ERM program, while 38 percent reported taking steps to set one up. Only 35 percent said they had no plans to develop one, down from 51 percent in the previous survey. Look for those numbers to shrink, as risk managers scramble to piece together whatever coverage they can get from insurers in 2002.