The Complete Risk Manager

Opinion by Craig Kent, head of risk consulting at Aon South Africa

Tight margins and “grudge purchases” don’t usually set the stage for positive relationships - especially when it comes to de-risking strategies. But what if they could?

Traditionally, businesses have viewed external risks as threats to be avoided and internal risks as operational challenges to be managed. By recognising both perspectives, organisations gain a more complete understanding of their total risk landscape and can develop stronger, more efficient strategies to mitigate it.

In this environment, the short-term insurance broker’s role has or at least should have, evolved to beyond policy placement. For many organisations, a broker functions as a strategic de-risking partner — analysing which risks are best to retain, transfer or reduce, or a combination of. This process typically involves three key steps:

1. Risk Identification - Analysing internal and external exposures.
2. Risk Quantification - Measuring their potential financial and operational impact.
3. Risk Management - Developing and implementing effective mitigation strategies.

While insurance remains a vital part of the de-risking framework, interpreting policy terms, conditions, limits and exclusions is rarely a simple process, where there is no one size fits all. A seasoned broker will be able to interrogate and translate the complexities into actionable decisions – advising the business on the various and the most appropriate options that are available. From here, your broker would be able to secure the best terms at a sustainable cost with policy wordings that is aligned with expectations, leaving the business with no unfortunate surprises at claims stage.  

A critical challenge lies in aligning a business’s appetite for risk with the insurer’s willingness to accept it. The most effective brokers don’t just facilitate cover - they position risks strategically to achieve optimal cost-efficiency. In doing so, they become an integral part of an organisation’s overall risk strategy.

Defining the Complete Risk Manager

The value of a broker goes beyond just premium savings, especially where such savings can leave gaps in cover. The value is derived from how effectively they can optimise the insured’s Total Cost of Risk (TCoR) - the full cost of managing risk across the business. TCoR includes amongst other costs - premiums, retained losses, risk mitigation investments, administrative costs and opportunity costs. A well-managed TCoR program delivers long-term resilience, not just short-term premium savings.

To achieve this, three principles apply in an ongoing cycle:

• Clear Risk Definition - Objectively assessing risks in terms of likelihood and impact.
• Empowered Advice - Enabling brokers to interrogate and advise on optimal mitigation and insurance strategies.
• Beyond Insurance - Exploring non-insurance solutions, ensuring the program remains relevant, efficient and aligned with business objectives.

A complete risk manager challenges assumptions, quantifies exposures and helps the organisation evaluate each mitigation option’s residual value against its cost. This structured approach highlights where strategic investments can deliver the greatest results.

Example (Basic): A warehouse with a loss exposure of R100 million could:

·         Install sprinklers for R7 million (meeting insurer requirements but still leaving the Maximum Possible Loss (MPL) expected value at R100 million, while reducing the Expected Maximum Loss (EML) to R20 million. Alternatively, it might be feasible to:

·         Add a fire wall and fire-rated doors for around R2 million, reducing the MPL exposure to R40 million, depending on where the wall is installed.

·         Combine both for layered protection.

The best choice depends on the business’s risk appetite — and a complete risk manager ensures that choice is made with clear financial rationale.

The Total Cost of Risk (TCoR) in Practice

TCoR represents the cumulative cost of managing risk – in addition to insurance premiums. Focusing only on insurance costs can be short-sighted; where a holistic approach looks to balance all four elements of risk management, known as the Four Ts:

1. Tolerate - Accept manageable risks.
2. Treat - Mitigate or reduce risk impact.
3. Transfer - Insure high-impact, low-frequency risks.
4. Terminate - Eliminate critical exposures entirely.

Mapping these across a likelihood-versus-severity matrix helps determine where each risk fits within the organisation’s appetite and strategy. This clarity ensures that risk mitigation investments - whether insurance, internal controls or elimination measures - are aligned to business priorities.

Understanding the Components of TCoR

A typical TCoR structure includes:

1. Insurance Premiums (Transferred Risk) – circa 50% Covers property, liability, and broking fees, as well as risk financing structures.
2. Uninsured Costs (Retained Risk) – circa~20% Includes deductibles, reputational damage, downtime, and losses below policy limits.
3. Risk Management (Managed Risk) – circa~15% Proactive investments such as maintenance, training, and compliance programs.
4. Opportunity Costs – circa~15% The cost of capital tied up in retained or uninsured risks.

This holistic perspective helps organisations balance the trade-offs between risk transfer, retention and prevention - and build resilience to volatile markets and claims cycles.

Influencing Insurance Pricing Through Better Risk Management

While insurers control the rates and terms, through factors such as market conditions, reinsurance costs, capacity etc, businesses can still influence how these are priced for them. A robust risk management philosophy to which the insureds actual risk profile aligns, allows the ‘Complete Broker’ to positively market the insurance portfolio to insurers, with a view to obtaining the best possible results. In so doing ticking the Transfer T of the TCoR basket.

Key strategies include:

1. Managing Loss Limits and MPLs - Reducing maximum possible losses through physical or operational controls.
2. Improving Claims Ratios - Minimising claim frequency and severity through proactive risk. management.
3. Strengthening the Risk Profile - Demonstrating well-documented risk prevention and business continuity programs in place.
4. Raising Deductibles Strategically - Through protection of #2 & 3, by retaining the minor loss exposures to allow the markets to attach covers above these (large / catastrophic losses).

Risk management today extends far beyond policy negotiation. A business empowered by a complete risk manager - one who integrates insurance placement with total risk strategy - gains visibility, control and long-term cost efficiency.

It’s not simply about lowering premiums; it’s about optimising the Total Cost of Risk. When the broker acts as a true strategic partner, risk becomes not just a grudge cost to manage - but a business advantage to leverage other business opportunities.

About Aon

Aon exists to shape decisions for the better — to protect and enrich the lives of people around the world. Through actionable analytic insight, globally integrated Risk Capital and Human Capital expertise, and locally relevant solutions, our colleagues provide clients in over 120 countries and sovereignties with the clarity and confidence to make better risk and people decisions that help protect and grow their businesses. 

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Disclaimer:

This document has been compiled using information which was current and accurate as at the date of publication.  The information contained in this document should not be considered or construed as insurance broking advice and is for general guidance only. Accordingly, the information contained herein is provided with the understanding that Aon, its employees and related entities are not rendering insurance broking advice. As such, this should not be used as a substitute for consultation with an Aon Broker or Consultant.

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