Office of Risk Management

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Cost of Risk

Ultimately, the Office of Risk Management defines the “cost of risk” as “the cost of actual losses sustained, administrative costs of the risk management program, costs of funding losses, cost of risk control efforts and other outside service costs.

Four Major COR Components:

1. Total cost of losses sustained.

For the purposes of this deliverable, only losses borne directly by your agency (not those paid centrally, i.e., disability compensation and tort liability claims above $10,000), should be included.  This category also includes, but is not limited to, lost, damaged, or destroyed office equipment and damaged or destroyed District vehicles.

2. Administrative costs of your risk management program.

Determine the pro rata portion of the salaries of the ARMR, RACC, Safety Committee and BERT (Building Emergency Response Team) members that are devoted to risk management activities.

3. Cost of funding losses. 

This category includes such things as insurance and bond premiums to transfer and fund losses.  Check with your Chief Financial Officer to see if there are any insurance policies carried by your agency that you may be unaware of.

4. Cost of risk control efforts.

What is your agency’s mission?  What kinds of things will get in the way of carrying out that mission?  What is the cost to your agency for not complying with rules and regulations applicable to your agency?  The overriding question you must ask yourself is “What am I doing in the agency that is designed primarily or solely to reduce or eliminate risk?  These risk-mitigating strategies or countermeasures are cost of risk items.  However, once they become part of your normal operations, i.e., engrained in your business processes, they should no longer be included in your cost of risk calculation.  Look at your Risk Management Plan; the mitigation strategies (risk control efforts) addressing your dynamic list of prioritized exposures are the basis for determining the project costs associated with each of those strategies.  A “sub-ledger” of these costs will need to be accounted for monthly (cumulatively and the change from month-to-month). 

The Cost of Risk report is a monthly tool that measures the financial impact of risk and risk control efforts.  The Cost of Risk report includes paid losses and costs related to managing risks. Cost of Risk Reports are due to the Office of Risk Management March 15 and October 15.