Canadian Underwriter

Cost of risk puts pressure on small companies

February 21, 2003   by Canadian Underwriter

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The cost of risk, including insurance, is about US$2.45 for every US$1,000 of revenue, says a new study from Marsh Inc. The study of U.S. companies also found that this cost varies dramatically depending on the size of the business, with smaller companies paying as much as 11-times more than larger corporations.
Among the risks accounted for in the study are auto liability, general liability and workers’ compensation. The cost figures also includes expenses associated with casualty risk transfer, funding and administration, including retained self-insured losses, claims handling and associated administrative costs, and other out-of-pocket costs. Workers’ compensation took by far the largest chunk of the risk pie, accounting for US$0.62 of every dollar spent on casualty exposures. However, Marsh notes this exposure has historically required a large piece of risk spending, as well as sustained focus on risk mitigation.
Economies of scale paid off for larger corporations, where firms with US$10 billion in revenue paying about US$1.68 per US$1,000 of revenue for casualty exposures. This compares with companies of $200 million or less in revenue paying about US$18.74.
“Larger employers have been able to enjoy similar economies in each of the three areas of risk we examined,” says Timothy Brady, a managing director in the casualty practice of Marsh. “As a result, they generally enjoy a competitive advantage as respects the casualty insurance component of their overall cost of goods sold.”
However, Brady adds that a company’s effectiveness at managing risk and how it is perceived by insurers may also play a large role. “For example, a small firm that effectively manages its exposures can have a lower cost of risk than a larger company with poor risk management.”
Amongst the 23 industry’s surveyed, construction paid out the largest amount in workers’ compensation at US$4.54 per US$1,000 in revenue, with mining and energy at the low end of the spectrum at US$0.33.
Government entities paid out the highest in general liability costs at US$5.94 per US$1,000 in revenue, compared to just US$0.10 for the transportation equipment industry.

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