Managing Your Total Cost of Risk

As a manufacturer, how do you quantify your true cost of risk? For example, if you are faced with a recall, how do you calculate your loss of reputation or market share? It is difficult, at best, to quantify this scenario. In contrast, other components of your cost of risk are easily identified, such as insurance premiums, or lost production costs caused by downtime of a custom piece of machinery.

Total cost of risk is an insurance term describing the cost of both pure and speculative risk. It is synonymous with price — the price of your risk management program.

We take a total cost of risk approach to positively affect your price by protecting the following four main asset categories:

  1. Organization
  2. Personnel
  3. Property
  4. Net income

The structure of your risk management program looks to help decrease your total cost of risk. To reach that goal, we help you with the following:

  • Analyze your exposures
  • Implement control measures to those exposures
  • Determine risk transfer or financing options
  • Manage current and future exposures

Identification of Exposures

As part of our risk management interview process, we look to confirm that your risk management approach supports your overall business objectives and plans for your company’s future. How would your income or cash flow be affected if there were unforeseen depletions of capital or a shutdown in the plant? Discussing the qualitative aspects of your business provides the important details needed to solidify a plan to help your business succeed, even if the worst happened. Risks can be both qualitative and quantitative. Analyses into both offer the foundation for developing forward-thinking approaches to those exposures.

What is your viewpoint on risk? Is your company risk-averse? Is it in a financial position to take on more risk versus transferring that risk to another party or contractually to a carrier? To help determine your risk aversion, it helps to assess your company history. For example, if you are a start-up company, cash flow and funds are typically tight, so you are more likely to be adverse to risk to protect the financial viability of your start-up organization. Conversely, if your company has a 20-plus year history, there are also risks, including becoming obsolete, stagnant or too conservative with your business plan. 

Additionally, we consider norms in the manufacturing industry, your market position and competition to position your risk management solution to the changing needs of your business. 

Quantitative analysis supports the qualitative interview. We look at the “hard numbers” and prior losses to identify trends in your performance. We also analyze those losses to identify the following:

  • Average incurred costs per loss
  • Total incurred trends
  • Top loss drivers
  • Locations with high frequency issues
  • Fraud behaviors
  • Reporting lag time
  • Frequency vs. severity ratios
  • OSHA-recordable performance

The results of our in-depth analysis will reveal opportunities to approach the critical areas driving your total cost of risk. We will isolate the root causes of these problematic areas and look to implement control measures to mitigate this exposure.

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