For the second consecutive year, the overall cost of risk declined to the lowest point in over a decade, according to the newly released 2001 RIMS Benchmark Survey®. The 200-page survey, co-produced by the Risk and Insurance Management Society, Inc, and Ernst & Young LLP, reports a reduction to $4.83 per $1,000 from last year’s $5.20, driven by lower premiums, and lower property and workers’ compensation losses.
“The decline in the cost of risk for the United States and Canada is not surprising, given the widespread reports that guaranteed cost liability insurance was readily available until last spring,” said Sue Anne Mitro, RIMS research committee chair and risk manager for The Hillman Company. “In fact, we found reports of rate increases and increasing premiums for all major lines for repeat participants.”
“In spite of participants reporting a lower cost of risk in the year 2000, we have anecdotal evidence that this trend is reversing in 2001,” said Steve Lawrence, National Practice Leader with Ernst & Young’s Insurance Risk Management Practice. “There are indications of the market hardening, including a large percentage of premium increases on renewals in the first and second quarter of 2001. We also know that insurers’ results will be significantly impacted by the events of September 11, 2001.”
It is important to note that the largest factor contributing to the decrease in the overall cost of risk was the increased participation by large organizations with lower costs of risk, including eight U.S. organizations with more than $50 billion in revenues, up from only two in 1999.
The survey, conducted among 837 organizations in the United States and Canada, also found:
*The insurance market was already hardening in 2000.
*Overall liability costs increased in the United States, up 19 percent from 1999, but decreased in Canada by a reported 31 percent.
*Interest in and application of, Enterprise Risk Management (ERM) is rising. Twenty-six percent of the survey respondents adopted some type of ERM program, while 38 percent reported taking steps to establish one. Only 35 percent have no plans to develop an ERM program this year, down from 51 percent last year.
*Low concern with e-business risk is driving weak demand for new coverages. Overall U.S. property costs decreased 20 percent from $0.85 in 1999 to $0.68 per $1,000 of revenues in 2000. Overall Canadian property costs plummeted by a substantial 41 percent from C$1.66 in 1999 to C$0.99 per 1,000 in 2000.
In Canada, the average cost of risk reached its second-lowest point. The decrease, driven by lower premiums and losses, plunged to C$1.88 per C$1,000 of revenue after rising to C$2.88 in 1999. Canadian data excludes workers’ compensation-type costs.
The cost-of-risk concept, developed in 1962 by former RIMS president, Douglas Barlow, includes the costs associated with an organization’s risk management functions.
In particular, cost-of-risk benchmarks insurance premiums, retained losses, internal administration, and certain outside services. Benchmarking is a process by which an organization can compare its performance and practices with those of similar entities.
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