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Total Cost of Risk Declines for Fourth Year—A New Normal?

Downward Trend-SF
July 05, 2018

In the face of record-setting natural catastrophes and an ever-evolving risk environment, the average total cost of risk (TCOR) trended lower for the fourth year in a row—a 3 percent decrease. According to the newly released 2018 RIMS Benchmark Survey, TCOR decreased from $10.07 per $1,000 of revenue in 2016 to $9.75 per $1,000 of revenue in 2017.

The marginal decline was driven by decreases in property, liability, workers compensation, management liability, and professional liability costs, as well as overall risk management administration costs.

The annual the Risk Management Society (RIMS) survey, produced with Advisen Ltd., is a source of benchmark statistics with industry data for thousands of insurance programs from hundreds of organizations, including the programs of hundreds of Fortune 500 companies. It tracks changes in insurance policy renewal prices as reported by North American corporate risk managers.

The key findings of the 2018 RIMS Benchmark Survey are as follows.

  • Total cost of risk per $1,000 of revenue fell 3 percent in 2017 as compared to 2016.

  • TCOR fell, despite record high natural catastrophe losses.

  • A significant driver of lower TCOR was an 8 percent drop in liability costs.

  • While TCOR per $1,000 of revenue fell for most industries, four—health care, government and nonprofit, information technology, and consumer staples—saw rising TCOR in 2017.

  • The percentage of companies buying cyber insurance has increased from 35 percent in 2011 to 65 percent in 2017.

Dave Bradford, cofounder and chief strategy officer for Advisen, commented, "Market conditions are favorable for insurance buyers. A competitive insurance market resulting from a chronic overabundance of risk capital strongly contributed to TCOR decreasing steadily since 2013. Not even record catastrophe losses in 2017 could derail the downward trend."

Mr. Bradford added that the traditional cycle of insurance price increases and decreases seems broken. "For many decades, the property/casualty insurance industry followed a relatively predictable cycle of price increases and decreases. However, for more than a decade, the overall trend has been downward. Rate levels have fluctuated over the years, but the last genuine hard market was in the early years of the 21st century."

Mr. Bradford noted that the traditional insurance pricing cycle may seem broken, but "broken" is more likely a new normal resulting from a more efficient insurance market. "The factors contributing to this more efficient market are varied and complex, but the upshot is that a hard market like that last seen in 2001–2002, when commercial insurance rates shot up 50 percent, may simply never occur again. Prices may rise, but most likely they will be quickly beaten down by fresh capital flowing into the market. That is good news for risk managers."

"As the tools, resources, and technologies that facilitate the exchange of ideas and experiences continue to improve, risk management professionals have become better equipped to strengthen their risk financing programs and apply cutting-edge, cost-cutting strategies," said RIMS CEO Mary Roth.

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