Captives

TCOR—Total Cost of Risk

Peter Drucker, who is considered by many to be the single most important thought leader in the world of business management, coined the phrase “if you can’t measure it, you can’t improve it.” When evaluating the effectiveness of your risk management program, TCOR (total cost of risk) ensures you are not only measuring the success of the program but also uncovering areas in need of improvement.

Key points

  • If you don’t measure it, how can you differentiate your successes from failures?
  • When you see success, reward it and learn from it.
  • If you can’t see success, you may be rewarding failure.
  • If you recognize failure, you can correct it.

To continually measure the success and effectiveness of your risk management program, a total cost of risk analysis must be completed.

What is total cost of risk and how do I measure it?

Some definitions of total cost of risk include:

  1. The costs incurred to deliver an effective risk management strategy.
  2. A tool for evaluating the overall costs of an organization’s risk management operation relative to other key measures (e.g., revenues, headcount, asset base).
  3. A metric used to evaluate the success of your risk management process.

Simply put, TCOR is the cost of managing risks and incurring losses. Total cost of risk is the sum of all aspects of an organization’s operations that relate to risk, including retained (uninsured) losses and related loss adjustment expenses, risk control costs, transfer costs, and administrative costs.

Components of TCOR

TCOR has traditionally been defined under three broad cost categories:

  1. Premium: Cost to transfer the risk to the insurance carrier.
  2. Losses: All retained losses related to claims (including deductibles and self-insured policies).
  3. Administrative: Internal and external risk management costs.

By identifying and quantifying these costs, we can plan and implement risk management strategies to reduce them.

Where do I start?

Identify, track, and monitor all costs related to risk for your organization:

  • The first and easiest component to track is your insurance premiums and broker commission.
  • Retained losses ̶ All out-of-pocket loss costs (deductible, self-insured policies).
  • Costs to protect employees/customers/property (safety manager, claims, HR, QC/QA, safety training, safety equipment, warning signs, etc.).
  • External risk control costs (third-part administrators, attorney, safety training, etc.).
  • Lost production due to losses/injuries (retraining, doctor visits, physical therapy, incident investigation, spill clean-up, machinery repair, etc.).

Compile these risk management costs for a minimum of two years (three to five years is preferable). Once compiled, review and rate each item based on effectiveness and improvement needed. Prioritize the items based on improvement needed and work through the list. An action plan (incorporating risk management, fleet manager, HR, safety and health, and claims management team members) must be put in place to oversee and implement programs, policies, procedures, and training needed to improve the total cost of risk for each respected line item.

Once a baseline has been established, continually monitor the program effectiveness based on the original baseline.

Risk Management Cycle

References

Port of Houston Authority
IRMI
Analytic Broker – Total Cost of Risk Definition
Origami Risk – How to Tackle Total Cost of Risk (TCOR)
Property Casualty 360 -Total Cost of Risk Focus Boosts Bottom-Line Results

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