Risk Management and Cost

The past year saw a great many natural disasters striking all over the world. Between the rash of tornadoes, floods, and earthquakes that devastated a number of regions and countries, it should come as no surprise that the metric typically used for calculating corporate expenses with regard to the risk management and insurance against risks – the total cost of risk (TCOR) -saw a general spike over this time period as well.

However, what has surprised many is how relatively low this increase really was. Particularly in relation to the severity of the disasters in question. A risk management study conducted of over 1,000 organizations. Released just last month, has indicated that this increase was a marginal 1.7% to the total cost of risk. Equivalent to an increase of seventeen cents per $1,000. This survey also demonstrated that, despite an estimated $116 billion in insured losses. Rate levels have been kept under pressure as a result of the continued over-capitalization of the property-casualty industry.

All the same, while last year may have been close to record defining in its insured disaster losses. Even as property coverage rates have increased. That does not seem to have prevented there from being a noticeable increase in coverage as well for many of those more disaster prone regions. In fact, where risk costs are concerned. The property insurance factor rose by roughly 9% with a nineteen cent per $1,000 mark up.

While this may not seem like too dramatic an increase. For those companies seeking to keep their assets as liquid as possible. An issue which is at the top of many companies agendas at this moment. Such an increase could create a few minor complications. What is more, however, there seem to be a number of less than ideal stipulations and requirements made by many insurance companies. Primarily in the form of the requirement of some form of collateral to be put up against the possible failure to pay premiums, that being cash, letters of credit, market securities, etc.

Fundamentally, risk management is all about trying to identify, asses, mitigate, and insure against any and all possible risk factors that may threaten an organization. However, natural disasters are among those factors that are the most potentially catastrophic to any company’s resources and functionality. And yet these are the most unforeseeable and unpreventable threats as well.

To counter such potential threats, all companies can really do is to make sure they have thoroughly insured themselves. And particularly for those who are within proximity to disaster prone areas. Ensure that the company’s information and resources are not all in one location. Where they could all be destroyed by one freak occurrence, effectively crippling the organization. In the end, while the total cost of risk may have risen only risen slightly. And though there may be a variety of complications to make insuring against these natural disasters complex for many companies, ultimately, lest they risk a nightmare to their assets and infrastructure. Not to mention their corporate governance programs, there is only really one answer.