Why the Risk Management Effort is Cost Effective

The cost of risk management is often compared to the cost of an accident. In other words, it is cheaper to proactively manage risks than to pay for the clean-up after an issue has arisen. A Risk Management Officer (RMO) or team can be compared to an insurance policy—the organization pays premiums (costs) to be protected against potential loss (benefits).

Demonstrating quantifiable benefits of proactive risk management can be difficult because many benefits are realized over time and some benefits may never be realized if no accident or issue ever occurs. However, there are some methods for demonstrating the cost-benefit of the risk management effort.

Reviewing Past Incidents/Accidents – By looking at past incidents, trends can be identified which can help predict future losses. Furthermore, by analyzing past accident data, the RMO can estimate how much money was saved by having a risk management program in place. For example, if there have been 3 slips and falls in the office over the last 2 years and each one required a week of medical leave and $1,000 in workers compensation, then it can be estimated that the risk management program has saved the company $9,000.

Analyzing Industry Data – There may not be any relevant data available internally so industry data can be used as a surrogate. This data is often available from professional associations or insurers. Also, most companies purchase commercial general liability (CGL) insurance which will have some claim data that could be leveraged.

Comparisons to Other Companies – Another method that can be used is to compare the organization’s performance to others in its peer group or industry. This will provide some context as to how well the organization is managing its risks relative to others. Often times when best practices are benchmarked and shared, it will help raise the level of risk management across an entire industry.

Proactive risk management provides many benefits that can save an organization time, money, and resources. By review past incidents, analyzing industry data, and comparing to other companies – organizations can begin to put a dollar value on their risk management efforts and demonstrate quantifiable results. When properly utilized, the risk management function can help avoid costly accidents and issues while adding tangible value to an organization.

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