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💰 '''Cost of risk''' is a comprehensive metric that quantifies the total financial burden an organization bears in managing its insurable and uninsurable exposures. In the insurance industry, it encompasses far more than just [[Definition:Insurance premium | premium]] expenditures — it includes [[Definition:Retained loss | retained losses]], [[Definition:Risk management | risk management]] and [[Definition:Loss control | loss control]] expenses, administrative costs associated with [[Definition:Claims management | claims handling]], and the indirect costs of [[Definition:Risk transfer | risk transfer]] arrangements such as [[Definition:Deductible | deductibles]] and [[Definition:Self-insured retention (SIR) | self-insured retentions]]. Insurers, [[Definition:Risk manager | risk managers]], and [[Definition:Insurance broker | brokers]] rely on this figure to evaluate whether an organization's overall approach to risk is financially efficient.

📊 Calculating cost of risk typically involves aggregating all direct and indirect expenditures related to an organization's [[Definition:Risk financing | risk financing]] strategy over a defined period, then expressing the result as a ratio — often per unit of revenue, per employee, or per exposure unit. A [[Definition:Commercial insurance | commercial]] [[Definition:Policyholder | policyholder]] might work with its broker to benchmark this figure against industry peers using data from organizations like the Risk and Insurance Management Society (RIMS). The analysis reveals whether shifting more risk to an [[Definition:Insurance carrier | insurer]] through broader [[Definition:Coverage | coverage]], or retaining more through a [[Definition:Captive insurance company | captive]] or higher deductible, would lower the total cost. Insurers themselves also track their own cost of risk internally, factoring in [[Definition:Reinsurance | reinsurance]] costs and [[Definition:Capital allocation | capital charges]] against their [[Definition:Underwriting portfolio | underwriting portfolios]].

🔍 Understanding this metric gives organizations a disciplined framework for making insurance purchasing decisions rather than simply chasing the lowest premium. A company that slashes [[Definition:Insurance premium | premiums]] by raising its [[Definition:Self-insured retention (SIR) | SIR]] may celebrate briefly — until a spike in [[Definition:Loss frequency | loss frequency]] reveals that total cost of risk actually increased. By keeping all components visible, the metric discourages siloed decision-making and encourages a holistic view of [[Definition:Enterprise risk management (ERM) | enterprise risk management]]. For insurers and [[Definition:Managing general agent (MGA) | MGAs]], helping clients reduce their cost of risk strengthens retention and positions the carrier as a strategic partner rather than a commodity vendor.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Total cost of insurable risk (TCOR)]]
* [[Definition:Risk financing]]
* [[Definition:Self-insured retention (SIR)]]
* [[Definition:Captive insurance company]]
* [[Definition:Loss control]]
* [[Definition:Enterprise risk management (ERM)]]
{{Div col end}}

Definition:Cost of risk - Revision history

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