Cost of risk declines in 2000, but signs point to hardening

The cost of risk declined in 2000, according to a survey released by the Risk and Insurance Management Society (RIMS). The annual Benchmark Survey, conducted with Ernst & Young, asks more than 830 risk managers in the U.S. and Canada to tally costs associated with risk management functions, including insurance premiums, retained losses, internal administration and outside services.The survey shows the cost in Canada dropped to $1.88 per $1,000 of revenue, driven by lower premiums and loss costs. This compares with a level of $2.88 in 1999.In the U.S., the cost fell to US$4.83 per $1,000, down from US$5.20 in 1999, partly the result of lower premiums, and lower property and workers’ compensation losses. However, the size of organizations surveyed also played a role, with more large companies (more than US$50 billion in revenues), who have lower risk costs, participating.”The decline in the cost of risk for the United States and Canada is not surprising, given the widespread reports that guaranteed cost liability insurance was readily available until last spring,” says Sue Anne Mitro, RIMS research committee chair and risk manager for The Hillman Company.However, rates are on the rise. “In spite of participants reporting a lower cost of risk in the year 2000, we have anecdotal evidence that this trend is reversing in 2001,” says Steve Lawrence, national practice leader with Ernst & Young’s Insurance Risk Management Practice. “There are indications of the market hardening, including a large percentage of premium increases on renewals in the first and second quarter of 2001.”He adds that dismal third quarter results due to September 11 losses are also a factor.While liability costs rose in the U.S., up 19% in 2000, they decreased in Canada by 31%, respondents report. Property costs dropped in both countries, by 20% in the U.S. and 41% in Canada. The survey also shows that the once predicted demand for e-business covers did not assert itself in 2000.