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Reducing Cost Through Risk Optimization

How confident do you feel about the risk financing decisions that your organization makes? You may be able to find significant cost savings that go straight to the balance sheet.

The financial crisis is prompting many companies to think twice about the creditworthiness of their insurers and reinsurers. This is leading to a broader reassessment of risk transfer programs.

In fact, decisions about how much risk to retain, how much risk to transfer and how to finance retained risk are core financial decisions for commercial enterprises. Understanding the risks contained in your risk financing program is now more important than ever. The benefit can be not only bottom-line savings but a better understanding of your counterparty risk exposure.

Conventional Expense Paradigm for Risk Financing Decisions

Does the following sound familiar? You get quotes for coverage from several commercial carriers. You commission an actuarial study to derive the funding amount for the risk you retain. The decision point is "which option reduces my expense — an insurance premium or a self-insurance accrual?"

A Better Corporate Finance Paradigm

This process falls short of meeting your real needs. Basing decisions on a trade-off of expenses does not reflect the actual reason you buy insurance in the first place — to finance volatility.

Managing insurance through the prism of corporate finance makes better sense. It enables you to compare the implicit charge for insurance to the cost of capital. And you position your business to manage the volatility of the gross risks to a net position.

This isn't simple. Knowing exactly where to set retentions and limits requires expertise in corporate finance, actuarial methods, risk assessment and insurance strategy.

That's where Towers Perrin comes in. We help clients optimize risk financing decisions through a rigorous set of analytics and a pragmatic approach. It's a process that enables you to:

• determine appropriate retention levels across all classes of risk
• improve risk financing decisions by saving on insurance costs through innovative use of traditional and nontraditional sources of contingent capital
• enhance corporate governance, monitoring of risk controls and alternative risk response treatments by creating a transparent line of sight to risk financing.
   

We have assisted many clients' annual independent reviews of their risk financing program. These efforts often result in savings ranging from 10% to 30% of the total cost of risk. Let us help you improve your risk financing decisions, too.

To discuss how Towers Perrin can assist your company, please contact us to learn more.