How do you measure the return on investment of your risk management efforts?
In the graphic below, assume the following:
- Premium $1,000,000
- Broker commission $150,000 (15%)
- Risk management consulting fee $50,000 (fee for 12 months service)
Consider the ROI on your risk management fee of $50,000. What kind of savings could that fee generate? Based on the full 17 years of LicataRisk’s existence we can make the following reasonable assumptions:
- Premium will be reduced by a minimum of 10%, often much more. Let’s use 20%. That’s $200,000 saved.
- Broker compensation is excessive. What’s a fair fee for the broker to receive – say $70,000. That’s $80,000 saved.
- Total saved $280,000 first year (will carry forward to subsequent years).
What’s the ROI in the first year alone: 280/50 = 560%
Longer term, insurance costs are determined by underlying risk and by historical loss experience. We work with you to control cost of risk by:
- managing the flows of liabilities in contracts with business partners;
- loss control – preventing and/or minimizing losses;
- managing claims to control payouts and improve historical data.
THEN we go back to the insurance market and negotiate again.
Are these numbers realistic? It’s the difference between your company’s risk being managed and being unmanaged. In what area of business can you not completely turn around a process that is virtually unmanaged? (Like true management in every endeavor, we are referring to professional risk management).
The minimal risk management fee allows you to control large costs by making a small investment. Isn’t this the true definition of leverage? *
We’re always on your team, working hard to create ROI for you.
How leverage works
The true, original meaning of leverage is illustrated in the graphic – using mechanical means to allow a small effort to lift a large weight.
Leverage as applied to business is summarized in this definition from The Business Dictionary:
“The ability to influence a system, or an environment, in a way that multiplies the outcome of one’s efforts without a corresponding increase in the consumption of resources. In other words, leverage is the advantageous condition of having a relatively small amount of cost yield a relatively high level of returns. See also financial leverage and operating leverage”
Assume you buy a $1,000,000 building with 100,000 (10%) down. If the building doubles in value to $2,000,000 (x2) and you sell it, what is your return? You made 1,000,000 on a $100,000 investment (x10) . Even though the value of the asset only doubled, your return was 10 times your investment due to the principle of leverage as it applies to real estate. The leverage occurred when you were able to control a large asset (1M) with a small investment (100k).