Definition (1):
Cost of risk is a risk management tool that measures certain costs in a risk management program, including insurance premiums paid, retained losses, outside risk management services, financial guarantees, internal administrative costs, taxes and fees, and certain other expenses.
Definition (2):
The cost of risk is the cost of incurring losses because of risk and managing risks. The total of this cost is the sum of every aspect of a company’s functions relating to risk, consisting of retained (uninsured) losses, related loss adjustment expenses, administrative costs, risk control costs, and transfer costs.
Definition (3):
Cost of Risk (COR) refers to the- “quantitative measurement of the total costs (losses, risk control costs, risk financing costs, and administration costs) associated with the risk management function, as compared to a business’s sales, assets, and the number of employees.” The motive behind this comparison is determining whether the risk management’s total costs are decreasing, increasing, or being constant as an activity of the business’s economic function.
The common components of cost of risk are as follows:
- Administration Costs
- Risk Control Costs
- Mitigation Costs
- Losses
- Transfer Costs