Minimizing the Cost of Risk:A Property Owner’s Guide

Louis A. Gritzo, Ph.D.VP, ResearchFM Global

The World of Risk

Risk-Based Commercial Property Insurance

→Competitive and Stable

→Reflect Overall Risk

Complexity and Variability

No IF –> THEN Solution

Managing Risk in a World without Insurance

• Risk management line of sight• Clear, consistent, complete

view of risk• Fully understand hazards• Understand business impact • Focus on loss drivers • Measure and benchmark risk improvement

•The basis for sound decisions

Awareness,knowledge, and due diligence

• Reduce probabilityof event

• Protect business continuity

• Maximize yield from loss control expenditure

• Manage change

Practical prevention and control

• Reduce loss severity• Minimize impact to enterprise• Pre and post incident planning

LossMitigation

Risks Transferred:Property damage

Loss of ProfitsFixed/Continuing Charges

Corporate image and reputation

Loss of contracts

Investor confidence Penalties and charges

Total Risk

Damage to uninsured property

Deductibles

Damage from excluded perils

Community and employee relationsSelf-insured retentions

Management time/distraction

Sustained loss of sales

UninsuredInsured

Total Cost of Risk

Risk transfer cost

Self-Retained Losses

Administrative costs

Fees, commissions, and taxes

Loss control cost

Price competitiveness is important

Primary aim: achieve the lowest total cost of risk over time.

+Risk Finance Costs+Administration

+Self-Insured Losses+Loss Control Costs

+Fees, Commissions, and Taxes

=TOTAL COST OF RISK

ProbabilitySeverity

Consequence

Earthquake Events

7 – 7.9 156 – 6.9 1345 – 5.9 13194 – 4.9 13,000*3 – 3.9 130,000*2 – 2.9 1,300,000*

≥ 8 1Richter Scale Annual Average

* estimated

Con

sequ

ence

Annual Probability

0.2% 1%

Natural Hazards Risk Curve

Consequence = Severity x Exposure x Vulnerability

Risk Transfer

1% (100 yr) 0.2% (500 yr)

10 10% 2%

15 14% 3%

20 18% 4%

Managing the Cost of Risk Over Time

25 22% 5%

30 26% 6%

40 33% 8%

50 39% 10%

ProbabilityLi

feti

me

(yea

rs)1 in 3 chance

locations exposed to a 100 year hazardWILL EXPERIENCE AN EVENT every 40 years.

Conclusions

1. Overall Cost Of Risk Exceeds Insurance2. Target Reducing the Overall Risk Over Time3. Overall Rates Should Reflect Risk Be Competitive and Stable