Magazine article Risk Management

Cost of Risk Showed First Decrease in a Decade

Magazine article Risk Management

Cost of Risk Showed First Decrease in a Decade

Article excerpt

According to the ninth Cost of Risk Survey conducted by RIMS and Towers Perrin, the overall cost of risk dropped by 7 percent to $7.70 per $1,000 of revenue in 1993. This represented a major reversal of more than a decade of increases in the cost of risk as a percentage of revenue.

Among the major forces driving this turnaround were decreases in workers' compensation costs and in costs for large organizations. Since large organizations' cost of risk is driven much more by actual losses than by premiums and expenses, this is first-time evidence that risk management efforts may be reducing losses.

The survey results, which were released at the 33rd RAMS Annual Conference, also included information on: 1) total cost for insurance premiums and retained losses; 2) separate costs for property liability and workers' compensation exposures; 3) limits and retention levels of insurance programs" as risk management department size, responsibilities and reporting relationships.

Among the findings:

Workers' compensation costs decreased for the first time since 1990. Respondents reported a decrease in workers' compensation costs when measured as a percentage of revenue, payroll, total cost of risk and per employee. Both premiums and retained losses as a percentage of revenue decreased. Average 1993 workers' compensation risk financing costs decreased 10.2 percent, to $3.42 per $1,000 of revenue, following a 7 percent increase from 1991 to 1992.

Risk financing costs for large organizations decreased. Respondents with revenue greater than $5 billion reported a 10 percent drop in average risk financing costs, to $5.50 per $1,000 of revenue. respondents with revenue between $1 billion and $5 billion also showed a decrease in average risk financing costs.

The cost of risk dollar shifted towards property and liability costs. Workers' compensation risk financing cost, as a percentage of the total cost of risk, decreased from 46.3 percent in 1992 to 42.8 percent in 1993. Although workers' compensation costs continue to be the largest risk financing component of the cost of risk, liability risk financing costs now account for nearly as much of the total, at 39.4 percent of the cost of risk.

Large organizations continued to retain more risk than smaller ones. Large organizations invest more of their cost of risk dollars for retained losses than smaller organizations. …

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