Art. 06 · What a risk costs · 3 min read
Total cost of risk, not premium
Businesses optimise the one number that arrives on an invoice and ignore the three that do not.
Ask a business what its insurance costs and you will get the premium. The premium is one of four components, and frequently not the largest.
One: premium. Visible, invoiced, negotiated annually, and the only one most businesses track.
Two: excesses actually paid. Every claim you made where the first slice came out of your own pocket. Visible in the bank statement, rarely added up.
Three: losses you swallowed. The damage below the excess, the claim you decided not to make because of what it would do to next year's premium, the write-off nobody logged. This is the invisible one, and in most businesses it is substantial.
Four: prevention and administration. Alarms, locks, inspections, training, the time your finance director spends at renewal. Money spent to make the other three smaller.
- Premium: on the invoice
- Losses you carried yourself
- Spent to reduce the rest
Once you total all four, a lot of familiar arguments resolve themselves. A higher excess is not automatically cheaper. It moves money from column one to column two, and whether that is a good trade depends on how often you claim. A cheaper policy with more exclusions moves money into column three, where nobody will see it. Prevention spend looks like a cost in column four and is only justified by what it removes from the others.
Use it
- Build a three-year table. Four rows, three columns of years. Most of it comes from your accounts; the uninsured-loss row will need a conversation with operations.
- Start logging the third column now. Even a shared spreadsheet with a date, a description and a rough figure. In a year you will have something no broker can give you.
- Judge every change against the total. "Does this reduce the total cost of risk" is a different and better question than "does this reduce the premium."