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The Cost of Risk


When you own something or do something there is risk. Typically, people choose to cover off this risk by selling it to the insurance market. The insurance company charges a premium and then in the event of a covered loss happening, it is their responsibility to get you back to where you were before the loss as per the insurance policy conditions.

The four costs of risk that can be identified are as follows:

The first one that comes to mind is obviously the total annual insurance premium that you pay.

The second one that might come to mind is the deductible. As previously discussed in other articles this is essentially what you agree to pay in the first part of any insured loss, with the balance being paid by the insurance company.

Another cost would be the uninsured loss. This is a loss that takes place that you have chosen to self insure. Or if it is covered you may have decided that it is best to pay for this loss yourself given the size of loss and your current claims history (hopefully this is a well-discussed and a well understood decision.

The final cost that I can come up with is the risk management administration expense. This would include the time that you spend making insurance decisions and reviewing your policies, developing and exercising loss prevention programs, having/improving safety practices and standards, etc.

Be sure to seek advice and purchase insurance from an insurance broker who understands your business!