This document discusses minimizing the total cost of risk for property owners. It explains that the total cost of risk includes insurance premiums, deductibles, loss control costs, and losses from uncovered perils. The document recommends that property owners take a holistic risk management approach by improving awareness of hazards, implementing loss prevention controls, and reducing loss severity over time through mitigation efforts. The ultimate goal is to lower the overall risk and total cost of losses, not just insurance premiums.

1. Minimizing the Cost of Risk:
A Property Owner’s Guide
Louis A. Gritzo, Ph.D.
VP, Research
FM Global

2. The World of Risk

3. Risk-Based Commercial Property
Insurance
→Competitive
and Stable
→Reflect Overall Risk
Complexity and Variability
No IF –> THEN Solution

4. Managing Risk in a World without Insurance
Awareness,
knowledge, and
due diligence
• Risk management line of sight
• Clear, consistent, complete
view of risk
• Fully understand hazards
• Understand business impact
• Focus on loss drivers
• Measure and benchmark
risk improvement
•The basis for sound decisions
Practical
prevention
and control
• Reduce probability
of event
• Protect business
continuity
• Maximize yield from
loss control
expenditure
• Manage change
Loss
Mitigation
• Reduce loss severity
• Minimize impact to enterprise
• Pre and post incident planning

5. Insured Uninsured
Risks Transferred:
Property damage
Loss of Profits
Fixed/Continuing Charges
Corporate image and reputation
Deductibles
Self-insured retentions
Community and employee relations
Investor confidence Penalties and charges
Loss of contracts
Total Risk
Damage to uninsured property
Damage from excluded perils
Management time/distraction
Sustained loss of sales

6. Total Cost of Risk
Risk transfer cost
Fees, commissions,
and taxes
Administrative costs
Self-Retained Losses
Loss control cost
+Risk Finance Costs
+Administration
+Self-Insured Losses
+Loss Control Costs
+Fees, Commissions,
=TOTAL COST OF
Price competitiveness is important
and Taxes
RISK
Primary aim: achieve the lowest total cost of risk over time.

7. Probability
Severity
Consequence

8. Earthquake Events
Richter Scale Annual Average
≥ 8 1
7 – 7.9 15
6 – 6.9 134
5 – 5.9 1319
4 – 4.9 13,000*
3 – 3.9 130,000*
2 – 2.9 1,300,000*
* estimated

9. Natural Hazards Risk Curve
Consequence
Consequence = Severity x Exposure x Vulnerability
Risk Transfer
0.2% 1%
Annual Probability

10. Managing the Cost of Risk Over Time
Probability
1% (100 yr) 0.2% (500 yr)
10 10% 2%
15 14% 3%
20 18% 4%
1 in 3 chance
locations exposed to a 100 year hazard
WILL EXPERIENCE AN EVENT every 40 years.
25 22% 5%
30 26% 6%
40 33% 8%
50 39% 10%
Lifetime (years)

11. Conclusions
1. Overall Cost Of Risk Exceeds Insurance
2. Target Reducing the Overall Risk Over Time
3. Overall Rates Should
 Reflect Risk
 Be Competitive and Stable