Magazine article Risk Management

1990 Cost of Risk Survey: A Yardstick for Managers

Magazine article Risk Management

1990 Cost of Risk Survey: A Yardstick for Managers

Article excerpt

Nearly 30 years after Douglas Barlow formulated the cost of risk concept, it continues to be an important method for measuring and quantifying the results of the risk management and insurance function. Although risk managers continue to debate how to accurately measure an organization's success in controlling costs, the cost of risk is now considered the industry benchmark.

Mr. Barlow, a former president of RIMS and the retired risk manager for Canada's Massey-Ferguson Ltd., defined the cost of risk as the sum of net insurance premiums, unreimbursed losses (self-insured and self-retained) and the cost of risk control, loss prevention and administration. The cost of risk may also include any net costs or gains associated with a company's captive insurer. For an organization, the cost of risk provides a useful way to analyze costs over time and to compare various cost elements.

The 1990 Cost of Risk Survey is the fifth study conducted jointly by RIMS and Tillinghast, and it is the first year the survey has been conducted since 1985. It presents cost of risk data based on industry group and revenue category, in addition to aggregating the total cost of risk for all survey respondents. It also provides information regarding the structure of insurance programs and organizational risk management functions.

In April the survey questionnaire was mailed to 4,394 U.S. and Canadian member organizations of RIMS, and nine non-member organizations to gather information about the use of insurance brokers and agents as well as direct writers and reinsurers. A total of 809 companies responded, which comprised an 18 percent response rate. While 18 percent represents a sizeable increase over the 13 percent generated by the 1985 Cost of Risk Survey, it is nevertheless lower than the highest response rate of 23 percent in the 1983 survey.

RIMS and Tillinghast devoted more than 1,200 hours of professional and clerical time to compiling and analyzing the results, an effort which has not only improved the quality of the responses, but has also expanded the content of the survey. RIMS communicated regularly with its members regarding the project's status, helping to generate ongoing support for the 1990 survey.

The 1990 survey includes data for 27 industry groups based on Standard Industrial Classification (SIC) codes (see Respondents by Industry Group on page 47). Respondents are well dispersed throughout the 27 groups, with the greatest percentage of respondents, 9.27 percent, coming from the governmental sector.

In addition, the aggregate and average profile of 1989 operating data for all survey respondents shows overall totals and averages which are significantly higher than in past surveys. This is probably due to inflation, economic growth and larger organizations in the 1990 survey respondent base than those included in past surveys. Reported revenues totaled $1.3 trillion (746 respondents) in 1989, vs. $570.8 billion (454 respondents) in 1984. The 1989 figures show a 129 percent increase in revenues, yet only a 64 percent increase in the number of respondents providing revenues. The median and average revenue figures for survey respondents in 1989 were $510 million and $1.7 billion, respectively -- an increase of 19.2 percent and 39.3 percent from 1984.

Total cost of risk averaged $9,591,421 in 1989, up 59.1 percent from the $6,028,438 average of 1984. When stated as a percentage of revenues, the cost of risk was .52 percent in 1989, compared to .5 in 1984. For respondents reporting asset values, cost of risk decreased slightly over the five year period from .26 percent in 1984 to .21 percent of assets in 1989. Cost differences can be explained by better data reporting, changes in the mix of respondents and differences in the market cycle-driven pricing.

Of all industry groups, transportation service recorded the highest cost of risk as a percent of revenues at 2.81 percent. The next highest was health care at 2. …

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