Total Cost of Risk at Dockyard Brewing
Dockyard Brewing is a 60-employee craft brewery with $12 million in revenue, a taproom, and a new canning line that ships to 14 states. The owner pays $186,000 in commercial insurance premiums. The loss run shows 14 claims last year; the insurer paid $350,000 after deductibles. The insured absorbed $42,000 in deductibles and $18,000 in claims that fell under the deductible and were never reported. Safety and risk control spending was $48,000; internal claims administration and account service time was $22,000. The CFO also counts $15,000 in uninsurable costs - regulatory fines and goodwill credits to taproom accounts. The carrier offers an 18% premium credit to move from a $10,000 to a $50,000 per-claim deductible.
1. Compute the total cost of risk and explain what you included and deliberately excluded.
Read the worked answer
Total cost of risk = premiums + retained losses + risk control + administrative + uninsured losses
| Component | Amount |
|---|---|
| Insurance premiums | $186,000 |
| Retained losses ($42,000 deductibles + $18,000 never submitted) | $60,000 |
| Risk control / safety spending | $48,000 |
| Administrative and claims handling | $22,000 |
| Uninsured losses (fines, goodwill credits) | $15,000 |
| Total | $331,000 |
Excluded on purpose: the $350,000 the insurer paid. That loss is already funded by the premium; adding it double-counts and inflates the number by more than 100%.
Useful ratios: $331,000 ÷ $12M revenue = 2.8% of revenue, or about $5,517 per employee.
Why the distinction matters: premiums are 56% of the total cost, and the retained, administrative, and uninsured components are 44% - costs the client controls far more directly than rate. The conversation should be about the 44%, not the renewal quote.
2. Should Dockyard take the 18% deductible credit? Build the argument with numbers.
Read the worked answer
Savings: 18% × $186,000 = $33,480.
Cost: every claim between $10,000 and $50,000 shifts an extra $40,000 to the insured. Average incurred severity last year was $350,000 ÷ 14 ≈ $25,000 - squarely in that band. If even 4 of 14 claims land between $10,000 and $50,000 and average $25,000, the added retention is roughly 4 × $15,000 = $60,000 before considering severity creep.
Breakeven test: the credit is worthwhile only if the expected increase in retained loss is under $33,480 - roughly one claim a year in the $10,000–$50,000 band with modest severity. With 14 claims and an average severity of $25,000, that assumption is not credible.
Recommendation: decline the $50,000 deductible as offered. Instead:
- Ask for a $25,000 deductible quote (partial credit, partial retention) and price it against expected retention.
- Check the balance sheet: a $50,000 deductible is a cash-flow question as much as an actuarial one. A brewery with thin seasonal cash cannot fund three deductibles in one quarter.
- Ask about aggregate deductible caps per policy period - that converts an open-ended bet into a known maximum.
- Couple any deductible increase to a frequency reduction plan, since deductibles punish frequency, not severity.
A deductible change is a risk-financing decision, not a discount to grab at renewal.
3. The canning line is new. Identify the exposures it creates and how you would treat each.
Read the worked answer
Exposures and treatment:
- Equipment breakdown / mechanical failure of the line - wear-and-tear is excluded under property; add equipment breakdown coverage. Treatment: transfer, with preventive maintenance as the control.
- Spoilage and contamination - a batch ruined by a failed chiller or a contaminated seal is a property/BI loss, but microbial contamination is usually excluded. Treatment: spoilage endorsement plus a product contamination/recall endorsement, and a hold-and-release QA protocol as the control.
- Business income from line downtime - the line is likely the constraint resource; a single-line BI limit based on total revenue overstates recoverable loss but understates the true downtime cost. Treatment: quantify the actual dependency and set the limit on that basis; consider contingent BI for a co-packer if one is used.
- Product liability across 14 states - distribution multiplies jurisdictional exposure. Treatment: confirm the products-completed operations aggregate and consider an umbrella; retain via SIR only if the balance sheet supports it.
- Cargo and stock in transit - the commercial property form stops at the loading dock. Treatment: inland marine / cargo coverage.
- Recall-driven reputational and retailer chargeback costs - largely uninsured and the fastest-growing piece of the $15,000 uninsurable bucket. Treatment: recall endorsement with rehabilitation/consultant expense, plus contractual review with distributors.
Portfolio view: property and liability lines are being sold separately, but the canning line creates a single point of failure that crosses them. Present the exposures on one page and let the owner prioritize - that is the risk management service, not the quote.