Milliman retail cost of risk

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By Amy P. Angell | 06 September 2016

With retail sales in the United States projected to reach nearly $4 trillion1 in 2016, the cost of risk is estimated to be $23 billion. For 2016, the cost of risk for U.S. retailers is projected to average $5.93 per $1,000 of sales. The cost of risk is a means of measuring the liabilities retailers are exposed to in the course of doing business, and includes employee and customer injuries, lawsuits stemming from business operations such as employment practices, and property and inventory losses from weather events, thefts, and fires.

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Key findings

  • The average cost per household is $187 per year, or about the cost of one week of groceries for a family of four. This means that we could feed everyone in the United States for a week on the annual retail cost of risk.
  • Retail profit margins vary by sector, from 2.0% of sales to 6.5% of sales.2 Managing the cost of risk is therefore critical to maintaining profit margins, particularly for high-volume and low-margin retailers such as grocery stores.
  • Workers' compensation costs (the cost of workplace injuries) represent the largest single expense, at approximately 40% of the total. Approximately 4.0% of retail employees are expected to file a workers¹ compensation claim in 2016.
  • General liability risks (the cost of customer injuries) represent the second largest expense, at approximately 20% of the total. More general liability incidents (approximately one for every 500 people in the United States) are expected to occur in 2016 than workers’ compensation incidents.
  • Cyber risk is a rapidly rising cost, and it carries the potential for catastrophic claims and reputational damage, as well as significant cost and inconvenience for customers.

Figure 1: Retail cost of risk (per $1,000 of sales)

 

1U.S. Census Bureau. Monthly & Annual Retail Trade. Retrieved July 8, 2016, from http://census.gov/retail/index.html.

2Damodaran, A. (January 2016). Margins by Sector (US). NYU School of Business. Retrieved July 8, 2016, from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html.