Insurance that we pay can be seen as the cost of risk. We pay insurance companies a premium so that they can assume certain risks for us. When we pay these premiums, insurance companies set aside funds to be used to cover risk. However, if risk was a fixed variable and never changing, then the premium would be a fixed cost; in other words, risk and cost would form a 1:1 relationship. However, in the business world this is unlikely; therefore, “our cost of risk is the minimum insurance premium plus the excess premium plus uninsured costs or losses" (Wood, 2003).
In a proactive safety management program, one uses risk principles to identify, assess, and rank safety and health hazards, create a risk assessment matrix, and implement risk control actions. When people are proactive in minimizing risk, the cost of risk decreases. For example, cautious, proactive drivers who are constantly on the lookout for other cars are deemed less risky by insurance companies. Therefore, they have a lower premium then someone who has a history of not looking out and causing accidents (Sehn, 09).
A reactive safety program relies on changes after an incident has happened. This does not directly impact the initial cost of risk, but reactive changes from previous incidents can minimize the increase to the cost of risk. For example, a child in a sports stadium falls from the upper deck because of the lack of proper railings. The child has already been hurt so the incident has already happened. The insurance company for the stadium tells them they must fix all the railings or their premium will increase tenfold. The stadium then installs the proper railings (reactive safety) and the premium (cost of risk) only increases two-times. Another example are spot inspections. These are also reactive in that they are only done in response to a known or perceived problem (Wood,