Risk costs

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Risk costs (English: Total Cost of Risk) is a term from business administration that deals with the costs of risk management within an organizational unit .

background

Originally, the term risk costs was used in lending by financial companies . By calculating a risk premium as part of the credit price, an attempt was made to cover the risk of expected and unexpected defaults on the part of the borrower (also: credit costs).
In the course of the KonTraG in 1998, the understanding of the term was expanded to include non-financial companies and is now an essential part of risk management company task.
the so-called credit costs are accordingly based on current knowledge a special case of comprehension of risk costs represent.

object

The understanding of risk costs lies between risk management, risk controlling and cost management , whereby it cannot be directly assigned to any of the individual subject areas, as the transition in science and in practice is very fluid. Risk costs, which in many companies only come under “Total Cost of Risk” (TCR), are quantifiable and controllable costs that are identified and controlled in companies in terms of risk management. Management strategies are planned and implemented on the basis of these costs, which include risk management (e.g. insurance premiums ) as well as self- borne damage and the cost of equity . Risk costs can thus be understood as an adequate key figure ( risk measure ) for risk controlling.

The specification of the risk costs depends on the risks considered and on the costs associated with and taken into account . A clear demarcation for better identification of the risk costs is essential.

It is important to clarify what type of risk it is. Upon further consideration, the inclusion of certain associated costs and the nature of the risk transfer solutions must be determined. The transfer of risks is decisively influenced by the risk costs of the various alternative courses of action (see TCR approach). The constant transfer of such risks makes it possible to take more risks into account when building up success potential.

Using various approaches and measures, the goal is always to optimize and reduce risk costs. The reduction has become an indispensable business challenge in dynamic competition and can generate a competitive advantage through savings.

Types of risk costs

Essential components of the risk costs are, for example:

  • Costs for internal control systems and the organization of risk management (e.g. emergency organization)
  • Costs for risk transfer and external services (e.g. insurance premiums )
  • Costs of your own administration (e.g. personnel and material costs)
  • Costs of self-borne damage and damage settlement (e.g. deliberately uninsured risks )
  • (Imputed) costs of equity (e.g. to cover risk-related losses)

Since most of the risks are covered by equity, taking this into account is of primary importance for a company and is to be viewed as an essential component. All of these costs count as risk costs; one also speaks of a value amount for risks.

TCR approach

This procedure is intended to make the costs of risks in the company transparent and controllable:

As a first step, the types of risk are recorded and the associated costs are determined. The result is a “virtual captive ” which defines the risk costs to be optimized. The relevant associated costs are now recorded for each of these individual risks. From these considered risks, the overall risk position is determined using a risk aggregation , which depicts a detailed assessment of the company's inherent risk-bearing capacity. Aggregation is also a mandatory step to calculate the imputed cost of equity, which is the product of capital requirements and own cost of capital determine leave. With the help of these initially present individual risks, an attempt is made to use the effects of diversification to manage the risk in order to also support the minimization of risk costs. After laying the foundations for further decisions and strategies for the hoped-for reduction of risk costs, possible alternative courses of action are considered. These include, for example, the following measures:

In the further process, the alternative courses of action are restricted to three to five operations and compared with one another using the measure of success chosen here - the risk costs. Ultimately, the selected alternative course of action is planned in more detail and usually implemented in the form of various partial solutions.

Individual evidence

  1. ↑ P. Winter: Risk Controlling in Non-Financial Companies. In: FINANCIAL OPERATION. No. 11, 2007.
  2. ↑ a b A. Sica, What is Total Cost of Risk? , April 24, 2014. Retrieved June 7, 2016
  3. ↑ a b c d e f W. Gleißner, Optimization of Risk Costs . In: Journal of Insurance. No. 10, 2002. Retrieved June 8, 2016
  4. ↑ a b W. Gleißner (2011), Fundamentals of Risk Management in Companies, Munich: Franz Vahlen, ISBN 978-3-8006-4408-7 , p. 53.
  5. ↑ W. Gleißner, Risk Controlling and Strategic Risk Management - Why Risk Controlling is Important! . In: Controller Magazin. No. 07/08, 2008, pp. 35-42. Retrieved June 8, 2016.
  6. ^ A b c W. Gleißner: Total Cost of Risk: Value-oriented control of risk transfer strategies. In: Die Versicherungspraxis. No. 03, 2007, pp. 41-45.
  7. ^ W. Gleißner (2011), Basics of Risk Management in Companies, Munich: Franz Vahlen, ISBN 978-3-8006-4408-7 , p. 194.