A recent article in CFO noted that, in 2008, as supply outpaced demand, insurance costs slid. Even as financial markets churned, and the annual tally of natural disasters reached the second-highest level on record, the total cost of risk fell by nearly 10% last year, according to the latest Benchmark Survey released by the Risk and Insurance Management Society (RIMS).
More specifically, insurance premiums fell to an average of $10.68 per $1,000 of revenue in 2008 from $11.78 per 1,000 of revenue in 2007. Why? A number of reasons. Corporations have been reluctant to undertake any (new) activities that contain the slightest amount of risk and the demand for insurance has been shrinking because of the recession as risk managers explore (less costly) alternatives to traditional insurance to keep costs down.
Is this a good thing? I don’t think so. First of all, since some of the “alternatives” to risk management include reducing the size of the risk management staff, you know this is only going to result in more disasters down the line. Secondly, innovation and profit always require some risk. Without a few chances here and there, your supply chain will stagnate and you’ll eventually be overtaken by a competitor who tried something new, succeeded beyond their wildest imagination, and stole the market out from under you. So while you need to be cautious and insure you don’t bite of more than you can chew in the risk department, you can’t stop taking the odd risk. That’s ultimately how progress happens.