Purchasing Insurance is Simply Transferring Risk

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What is insurance?  It's a contract.  You are purchasing a contract to transfer your risk.  In that contract the insurance company agrees to pay in the event of a loss for whichever type of insurance you are purchasing, ie Auto, General Liabiltiy, Work Comp, Property, etc.  And when most people think of the cost of insurance, all they think about is the premium.  This is far from accurate. 

In a related article by a fellow Risk Advisor, Chris Moxley explains the Total Cost of Risk, outside of just the insurance premium.

Your TCOR (Total Cost of Risk) includes 3 major categories of Expenses:  Preventative Cost, Direct Cost, and Indirect Cost.  Together these equal your Total Cost of Risk.  Many people just think of their insurance cost alone but this is far from your total cost.  What is interesting is the cost you spend in one area can effect the amount you spend in another.  It is a proven fact that money spent in preventing claims or losses reduces your direct costs by several times the amount you spend.  Indirect costs are usually several times what the direct cost of a claim are so if you have some basic math skills, it doesn't take long to realize you should be spending more money in prevention of claims.  Here are some costs associated with each category that make up your Total Cost of Risk (TCOR):

  • Preventative - Safety & Risk Management, Pre-Employee Screening, Safety Equipment, Culture Management, Wellness, New Hire Training, salary of safety personnel & expenses, Personal Protective Equipment, Safety Meetings.
  • Direct- Insurance, Managed Care, OSHA Fines, Deductibles, Legal Expenses, Loss of Productivity post accident, Management time to administer Injury or attend hearings, Staff time to administer injury.
  • Indirect - Reputation with insurance carrier(s), reputation with vendors, loss of morale, loss of reputation, employee gossip, etc.

Considering all of these expenses why would anyone not want to spend more money on Preventative costs?

For more information regarding Risk Transfer and Risk Management contact Sean Leigh