Risk management was once regarded as a routine functional task of the risk manager alone, with little or no connection to the company's broader directions or priorities. However, risk management is now considerably more demanding, with chief executive officers and chief financial officers increasingly under the spotlight.

One reason for this trend is that good risk management is seen as a key part of a broader financial management strategy and linked to corporate priorities. This inevitably places increased reliance on good information around risks, risk controls, incident reporting and loss data. As most financial executives know, you can't manage what you can't measure.

When it comes to risk financing, there is also a gap that often needs to be bridged—the gap between understanding what it means to buy insurance versus what it means to look at insurance and risk within this broader financial management context.

Simply put, the key to risk management is understanding risk needs and using insurance as a financial tool. Inevitably, this leads to the concept of total cost of insurable risk (TCOIR)—the costs incurred by a business (beyond the obvious premium costs) to deliver an effective risk management strategy.

3 Criteria to Understanding Total Cost of Insurable Risk (TICOR)

The main components of TCOIR include actual or expected retained losses, cost of transferred risk (insurance premiums), plus external and internal risk management costs such as risk control and captive expenses.

Total cost of insurable risk may sound complex, but how can insurance be a solution to risk and financial management needs if you don't know:

• whether the solution matches your insurable risk needs
• the right amount of insurance to buy
• the point at which it is cheaper to retain risk rather than to insure it?

Without an appreciation of your risk needs and how to use insurance, you are left buying an insurance product that the markets are prepared to sell, as opposed to selling the insurable risk that you do not want to retain. You are also left with a limited understanding of the overall risk costs in your business.

CFOs and risk managers should work together to target the lowest sustainable cost of insurable risk. This means understanding how the different components both interact and contribute to the total. It also means identifying the best point between retaining risk and insuring it—where do you get the highest return on allocated capital?

Surveying Risk Management Information Systems (RIMS)

Aon carries out many surveys to measure risk management and the total cost of insurable risk in different industries. Aon Australia's risk management and total cost of insurable risk survey gives us a better understanding of how companies are profiling, treating and financing their insurable risk.

As part of the survey, Aon also highlights the top 10 risk concerns of executives. One of the key risk concerns now faced by companies is that of technology and information management, particularly as a source for reliable risk management information. This is understandable, given the heightened focus on governance in recent years.

A related and recurring theme is that of risk culture. Whether risk management responsibilities are centrally managed or dispersed around the company, businesses have identified the need to reinforce risk frameworks and systems through a proactive risk culture.

A risk management information system (RMIS) will help businesses to obtain the right data and monitor performance of control mechanisms—which all lead to improved governance.

Interestingly, there is sometimes a perception that investing in a good RMIS leads to an increase in your company's TCOIR. This is largely due to the improved capture of loss information and incident reporting from across the business.

Spending money to lower TCOIR may seem contradictory, but a good RMIS leads to more informed risk management decisions. This subsequently creates a targeted approach to reducing TCOIR.