Measuring the Cost of Risk

Thinking beyond insurance purchases to a new cost-of-risk metric can reduce financial and operational exposures.

As risk management moves from a tactical approach centered on insurance to a strategic approach that emphasizes enterprise risk management (ERM), risk managers and finance executives need to develop new tools to handle the emerging demands generated by this shift.

The traditional tools -- cost-of-risk metrics -- have served executives well. They tend to focus on insurance-based aspects of risk, including the price tag for premiums, claims and administration. But those metrics alone no longer do the job, because they usually omit the costs of the processes used to manage and reduce risks to acceptable levels. For example, they ignore expenditures required for setting up the policies and procedures that will help reduce the number and severity of accidents as well as the opportunity costs and cost of capital associated with insuring and retaining risk.