Cost of Risk

1. Greater risk usually implies greater cost.
2. Cost of risk can be divided into five components which are given below;

  1. Expected Losses
    i. Direct losses
    ii. Indirect losses
  • Loss of normal profit
  • Extra operating expenses
  • Higher cost of funds and foregone investment
  • Legal costs

b.Cost of Loss Control
i. Increase precautions
ii. Reduced activity
c. Cost of Loss Financing
i. Retention and self-insurance
ii. Insurance
iii. Hedging
iv. Other risk transfers
d. Cost of internal Risk Reduction
i. Diversification
ii. Investment in information
e. Cost of Residual Uncertainty
i. Effects on shareholders
ii. Effects on other stake holders