Risk management is the best way to control insurance costs

Insurance buyers, listen up! You’re grappling with hard markets (which is just underwriters making excuses for messing up in the past or being clueless about the risks they’re taking on), dwindling capacity, and a higher frequency of incidents—all leading to skyrocketing insurance costs. So, how do you secure that important coverage without draining your wallet? As a former CRO and Europe’s 2021 Risk Manager of the Year, I’ve used risk management to strike the perfect balance, optimizing coverage, doubling and tripling limits, keeping deductibles stable, and still slashing insurance costs by 40%. Buckle up, as I’m about to spill the beans on the risk management practices that helped me navigate these tough times!

Crunching the Numbers: Quantifying the Underlying Risk Profile for Accurate Insurance Limits

Forget high-level risk engineering surveys and qualitative advice from brokers—quantitatively estimating the risk profile for the risk you’re offloading to insurers is the way to go. This is crucial for determining appropriate insurance limits and expected losses. Whenever I crunched the numbers, I found that the risk profile was wildly different from what was traditionally used.

So, how do you quantify that pesky risk profile? Here’s the lowdown:

  • Gather company loss data for the specific insurable risk
  • Collect industry loss data for the same risk
  • Estimate the frequency of risk events per policy period using probability distribution
  • Estimate loss distribution per event, and adjust it to include catastrophic events not in the data set
  • Calculate loss exceedance curve, expected losses, and unexpected losses
  • Compare the company risk profile to the industry risk profile
  • Identify controls and build a narrative for the company risk profile

For instance, a manufacturing company discovered they were significantly underinsured after a thorough risk quantification exercise. By identifying and quantifying hidden risks, they revamped their insurance coverage, saving their assets from potential catastrophe.

Mastering the Art of Fair Pricing: Using Risk Profiles to Calculate Deductibles

Armed with your risk profile, you can now calculate the loss exceedance curve, which lets you estimate the fair cost of insurance at different deductible levels. This curve shows the probability of losses exceeding a certain threshold, guiding companies to the perfect balance between insurance and retention strategies.

A real estate development company discovered they were overpaying for insurance due to unfair pricing and ridiculously low deductibles. By switching primary providers and adjusting their insurance policy, they focused on retaining tail risk and chose higher deductibles that reflected their true risk profile—saving millions while keeping their coverage intact.

Playing the Field: Leveraging Risk Profile Information for Broker and Insurer Selection

With a quantified risk profile and an overview of risk management controls in hand, you can conquer the broker and insurance selection process. Use this info to negotiate the fairest price possible, optimizing coverage and minimizing costs.

A retail company faced soaring insurance premiums due to an industry-wide trend of rising rates. By presenting their quantified risk profile and risk management controls to brokers and potential insurers, they showcased their proactive risk management approach and mitigation measures. This transparency allowed them to negotiate better terms and secure more favorable pricing—resulting in massive savings on their insurance premiums.

Risk management was my secret weapon in controlling insurance costs and presenting risk transfer decisions to management and risk owners. Now it’s your turn to put it to work!

Note: I wrote this article in normal business tone and then asked ChatGPT to make it more edgy and provocative. So here you go. The audio is original in case you want to hear the first version. 

RISK-ACADEMY offers online courses


Informed Risk Taking

Learn 15 practical steps on integrating risk management into decision making, business processes, organizational culture and other activities!


ISO31000 Integrating Risk Management

Alex Sidorenko, known for his risk management blog http://www.riskacademy.blog, has created a 25-step program to integrate risk management into decision making, core business processes and the overall culture of the organization.


Advanced Risk Governance

This course gives guidance, motivation, critical information, and practical case studies to move beyond traditional risk governance, helping ensure risk management is not a stand-alone process but a change driver for business.


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