minimizing the cost of risk: a property owner’s guide
TRANSCRIPT
Minimizing the Cost of Risk:A Property Owner’s Guide
Louis A. Gritzo, Ph.D.VP, ResearchFM Global
The World of Risk
Risk-Based Commercial Property Insurance
→Competitive and Stable
→Reflect Overall Risk
Complexity and Variability
No IF –> THEN Solution
Managing Risk in a World without Insurance
• Risk management line of sight• Clear, consistent, complete
view of risk• Fully understand hazards• Understand business impact • Focus on loss drivers • Measure and benchmark risk improvement
•The basis for sound decisions
Awareness,knowledge, and due diligence
• Reduce probabilityof event
• Protect business continuity
• Maximize yield from loss control expenditure
• Manage change
Practical prevention and control
• Reduce loss severity• Minimize impact to enterprise• Pre and post incident planning
LossMitigation
Risks Transferred:Property damage
Loss of ProfitsFixed/Continuing Charges
Corporate image and reputation
Loss of contracts
Investor confidence Penalties and charges
Total Risk
Damage to uninsured property
Deductibles
Damage from excluded perils
Community and employee relationsSelf-insured retentions
Management time/distraction
Sustained loss of sales
UninsuredInsured
Total Cost of Risk
Risk transfer cost
Self-Retained Losses
Administrative costs
Fees, commissions, and taxes
Loss control cost
Price competitiveness is important
Primary aim: achieve the lowest total cost of risk over time.
+Risk Finance Costs+Administration
+Self-Insured Losses+Loss Control Costs
+Fees, Commissions, and Taxes
=TOTAL COST OF RISK
ProbabilitySeverity
Consequence
Earthquake Events
7 – 7.9 156 – 6.9 1345 – 5.9 13194 – 4.9 13,000*3 – 3.9 130,000*2 – 2.9 1,300,000*
≥ 8 1Richter Scale Annual Average
* estimated
Con
sequ
ence
Annual Probability
0.2% 1%
Natural Hazards Risk Curve
Consequence = Severity x Exposure x Vulnerability
Risk Transfer
1% (100 yr) 0.2% (500 yr)
10 10% 2%
15 14% 3%
20 18% 4%
Managing the Cost of Risk Over Time
25 22% 5%
30 26% 6%
40 33% 8%
50 39% 10%
ProbabilityLi
feti
me
(yea
rs)1 in 3 chance
locations exposed to a 100 year hazardWILL EXPERIENCE AN EVENT every 40 years.
Conclusions
1. Overall Cost Of Risk Exceeds Insurance2. Target Reducing the Overall Risk Over Time3. Overall Rates Should Reflect Risk Be Competitive and Stable