Risk Extraction and the Total Cost of Risk
Wise executives invest to prevent losses. Their monetary investment has two parts – financing risk to reduce the impact of loss and controlling those risks that initiate loss. Of course, the costs will vary by organization, industry, even geography, but some general estimates have surfaced over time. We reference one from Risk and Insurance Management Society here.
Most Risk Financing and Risk Control was already there when you arrived, and it would be considered irresponsible, even immoral, to reduce or eliminate any of it!
Yet, losses still occur! People are injured, and some die. Corporate directors are embarrassed. Executives are humiliated, terminated, sued, even imprisoned. Companies go bankrupt. We call this source of surprises Risk Extraction – "the involuntary penalty for unfinanced and uncontrolled risk". And its cost can be as much as 10-15% of revenues.
So, what is the true Total Cost of Risk for your organization?