Key Controls and Mitigation

In this section:

Do Companies Measure the Total Cost of Insurable Risk? | Total Cost of Insurable Risk Factors Measured | Is the Total Cost of Insurable Risk Increasing or Decreasing?

Do Companies Measure Their Total Cost of Insurable Risk?

In a concerning trend, the number of companies that measure the total cost of insurable risk (TCOIR) continues to decline. In 2021, 41 percent of respondents said their companies measure this cost, down from 43 percent in 2019. The percentage measuring TCOIR is particularly low in Asia Pacific and Europe, at 33 percent and 36 percent, respectively. In the current insurance-market environment, where markets have for the most part firmed and capacity has reduced while rates have increased, companies must balance the risk that they choose to retain and transfer to achieve optimal financial outcomes. Over the coming months, we expect more companies to adopt more scientific approaches to measuring TCOIR, perhaps mirroring respondents in the Middle East and Africa, which is in some respects an outlier in that 60 percent of respondents say their companies measure this cost, up from 53 percent in 2019.

Measurement of Total Cost of Insurable Risk by Region

Measurement of Total Cost of Insurable Risk by Revenue (in $)

Total Cost of Insurable Risk Factors Measured

Among companies that measure TCOIR, risk transfer costs are the element most likely to be measured across all regions and company sizes. The number of companies that measure this cost is high, but arguably it should be even higher given that the cost of insurance should be well known in an organization. Significantly more North American companies are measuring risk transfer costs, retention costs and external risk management costs — a more scientific and data-driven approach — than companies in other regions.

Across the board, more work is needed to measure total cost of insurable risk. While a number of companies continue to focus on driving down broker fees and insurance costs, this might be masking rising or volatile costs elsewhere in the company.

Elements of TCOIR Measured

Elements of TCOIR Measured by Region

Is the Total Cost of Insurable Risk Increasing or Decreasing?

Since our last survey, companies across the world have had to face a perfect storm — a challenging insurance market with pressure on capacity, coverage and cost, coupled with the emergence and acceleration of risks that are difficult to understand and address. This has increased the total cost of risk for many companies through a combination of steeper insurance costs and exposure to new risks, such as the pandemic, that are not necessarily insurable.

To an extent, this year’s survey reflects these developments, with 65 percent of all respondents reporting an increase in their total cost of risk and increases prevalent across all geographies and company sizes. Surprisingly, 9 percent reported that their total cost of risk has reduced. This could be caused by a variety of factors:

  • The company may have reduced in size or consolidated its strategy and operations over the past two years, leading to a reduced risk profile.
  • The company may have used market conditions to analyze its program design and levels of risk retention for the first time in a number of years, identifying opportunities to take more risk or use vehicles such as captive insurance companies to reduce its overall insurance spend.
  • The company may have limited oversight of its total cost of risk; for example, it may only be capturing insurance spend, as opposed to retained risk and losses. Cost of risk could be increasing without the company’s knowledge.

Whatever the explanation, we expect to see an increasing number of companies across all industry sectors take a data-driven and analytical approach to reducing total cost of risk while these underlying headwinds persist.

Total Cost of Insurable Risk by Region

Total Cost of Insurable Risk by Revenue (in $)

Captives

Have a question? Contact us

©2021 Aon plc. All rights reserved | Privacy Policy | Legal