Risk Management Costs Surge 5 Percent

Average corporate expense for insurance rose in 2012, fueling a jump in overall cost of risk.

Driven by rising insurance prices, the average expense corporations incurred for risk management jumped 5 percent last year, according to an annual benchmarking survey of the total cost of risk (TCOR) at nearly 1,500 organizations.

Average TCOR for all companies increased to $10.70 per $1,000 of annual revenue in 2012 from $10.19 in 2011, according to results from the 2013 RIMS Benchmark Survey released Thursday. TCOR is the sum of a company’s insurance expense, the cost of the losses it retains (via deductibles or self-insurance, for example) and the administrative costs of its risk management department. It’s generally expressed as a portion of annual revenue.

The 5 percent hike in risk management costs in 2012 came on top of a 1.7 percent uptick in 2011, the first rise after a few years of decreasing risk management costs.

Among lines of insurance, the contribution of property-insurance premiums to average TCOR grew nearly 6 percent, from $2.92 per $1,000 of revenue to $3.09 per $1,000 of revenue, according to the RIMS press release.

Referring to the survey results, Michael D. Phillipus, director of property insurance at Occidental Petroleum and a director of RIMS, said in the press release that insurance rates “are rising, but our research shows that improving rates attract new capacity, which makes it difficult [for insurers] to sustain the trend towards progressively higher rates.”

In terms of property insurance specifically, the tide seems to already be turning. This year, despite a number of recent highly visible catastrophes, those prices appear to be falling as a result of the influx of at least five new insurers and the possibility of the end of the era of low interest rates. Higher interest rates would mean higher investment income for insurers, who could then charge lower premiums to grab market share. 

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