What is Total Cost of Risk and why do I care?
“What gets measured…gets managed!” This statement is the fundamental principle behind the concept of “Total Cost of Risk” (TCoR), and I’ve been saying this for years. The question that I am asked all the time is, “what is total cost of risk (TCoR) and why do I care about it?”
There is risk associated with everything we do in life. In today’s world, business risk and the ability to quantify that risk in dollars is increasingly important. The purpose of any risk management program is to manage enterprise wide risks, which will, ultimately, lead to a reduction of the total costs associated with these risks. Businesses assume costs of risk to operate, the question is, what is the dollar value of managing these risks and how can I reduce it?
Let’s define Total Cost of Risk
Total Cost of Risk (TCoR) is a quantifiable, controllable number that can be identified and reduced. Simply put, TCoR is the total cost of your insurance premiums, retained losses (deductibles/uninsured losses) and internal/external risk control costs. By recognizing these costs we can plan and implement management strategies to reduce them.
Most people assume it's their insurance premiums alone. They're only partially correct: premiums are only a piece of the puzzle. While insurance premiums are the most visible cost associated with risk, they are hardly the only cost. There are many other costs associated with risk that are either not tracked or are viewed as fixed costs. That is the paradigm. What most business owners don’t realize is that these additional costs are controllable. All of the costs related to risk can be tracked and monitored. In addition, there are operational strategies that can be implemented which will manage and ultimately reduce these costs.
Elements of Total Cost of Risk (TCoR)
The first and most easily tracked component of Total Cost of Risk is insurance premiums. This includes the amount a firm spends on insurance coverage and brokers’ commissions.
The next element is retained losses. The retained loss value is the amount of money that a firm spends “out of pocket” for losses incurred. These are costs that are below a company’s deductible. An example is a small mishap such as dry-cleaning a client’s suit due to spillage from an employee.
Costs to protect employees/customers from injury
The next applicable costs may not be as easy to track but are still important components captured in the TCoR calculation. These are the costs needed to protect your employees or customers from injuries. Examples are safety equipment, mats, warning signs, training, etc. These costs should be tracked as part of the TCoR for your business internally.
Costs to engage firms for help with risk & insurance issues
The next component is money spent with professional firms to help you handle insurance or other risk associated issues. These would include costs for an attorney to respond to a complaint or to review a contract’s indemnification agreement. These are also part of the TCoR calculation and are considered external risk control costs.
Other relevant cost is productivity loss due to injuries or losses. Having your employees spend their time either driving other employees to the doctor, investigating incidents, cleaning up spills, etc. are also costs that are risk related and are taking away from your bottom line.
About the Author
Albert L. Sica is the Founder and Managing Principal of The ALS Group, an independent insurance and risk management consulting firm focused on helping clients reduce insurance and risk related costs. E-mail Al at [email protected], or call (732) 395-4251 for more information.
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