Evening the Score: Monitoring and Managing Total Cost of Risk

May 5, 2022

How much does risk management cost your company? If you don’t know the answer, your business might not be managing total cost of risk, or TCOR, as a key performance metric. Estimates show less than half of companies actively track TCOR. However, by not assessing risk and the associated costs, companies ultimately create more liability for themselves. Plus, the average cost of risk for businesses is up by more than 2% according to the Risk & Insurance Management Society. That makes understanding TCOR and using the data for decision-making more important than ever. 

What Is TCOR? 

Let’s use a scenario most of us have faced. You are driving down the highway and the car’s check engine light comes on. There is no indication if the car has a major malfunction or just a minor glitch. Either way, that little yellow alert indicates something requires attention. 

Think of total cost of risk (TCOR) changes as a check engine light for your company. 

TCOR represents the sum of all risk costs incurred by a business. Many companies assess risk management success based solely on increases or decreases to their insurance premiums. TCOR provides a more comprehensive way of measuring a risk management program’s effectiveness because it includes more data. 

As an equation, TCOR looks like this: 

Total Cost of Risk = Insurance Premiums + Self-Funded Losses + Risk Control Expenditures + Administrative Costs (Internal and External)

What the analysis includes determines TCOR accuracy. The most valuable TCOR metrics get granular to look at all costs associated with risk management, including less obvious expenses like: 

  • Brokerage fees
  • Collateral costs
  • Legal services
  • Reserves
  • Staff salaries and benefits
  • Professional training
  • Office space
  • Vendor costs
  • Property costs
  • Workers’ compensation costs
  • Taxes, interest, and debt servicing fees
  • Fines

A business or operating unit typically expresses TCOR as a percentage of total revenue. The 2019 RIMS Benchmark Study reported the average TCOR as $9.95 for every $1,000 in revenue. Multiply that by millions, or even billions, in income and the cost of risk becomes a significant factor in limiting profitability. 

Why Is TCOR Valuable? 

While TCOR is a more difficult metric to track, it rewards the hard work with several business benefits. 

First, simply collecting the data is a constructive exercise. Many risk costs go unnoticed and therefore untracked. Conducting a TCOR analysis unearths and quantifies all related costs to give a whole-picture look at risk expenses. Many of the costs are controllable and offer easy improvement wins.

TCOR information is increasingly important in insurance pricing negotiations. For underwriters, uncertainty leads to higher prices. Companies able to present accurate risk data helps insurers feel more comfortable, which in turn can moderate rate increases. 

The total cost of risk metric also helps with financial planning. Understanding costs can help a company set the appropriate risk retention levels or determine better ways to allocate capital. TCOR also can inform risk management decisions such as personnel increases or investments in RMIS platforms.

Most importantly, TCOR shows how well a risk program is managed. Establishing a TCOR allows businesses to standardize the data and set a benchmark. Year over year and across business units, companies can look for TCOR fluctuations. When the number significantly changes, the program needs extra attention. But beyond serving as the risk check engine light, TCOR also provides valuable insights into if actions driven by the data produce desired outcomes. 

TCOR in Action: 

A national construction company saw TCOR increasing disproportionately to revenue growth. The company first decided to increase its risk management workforce to address the problem. TCOR continued climbing beyond the investment in additional salaries and benefits. The company invested in staff training next. A recheck of TCOR showed a plateau in cost increases. As a third move, the construction company introduced risk management software and finally saw TCOR decline. The metric allowed the company to see the return on investment of the various resources they allocated to the challenge until they achieved the right result. 

How Is TCOR Calculated? 

Adding numbers in the equation and calculating the percentage is the easy part of TCOR. Implementing a process for collecting the right data takes more work. For companies new to tracking TCOR, following are key steps to launch the process: 

  1. Establish the right risk component categories for your business such as insurance premiums and deductibles, administrative costs, and risk transfer expenses. 
  2. Identify all costs contributing to the risk categories. 
  3. Determine the timeframe for data collection to set the benchmark. Common TCOR metrics represent the previous 12 months.
  4. Begin data collection across all cost areas. Address data quality and integrity issues along the way. 
  5. Add the component categories to establish the TCOR benchmark. 
  6. Determine improvement targets for TCOR. The company may want to set a target for each component category depending on performance. Goals should relate to the organization’s strategic objectives and be measurable, actionable, and timely.
  7. Address one TCOR area at a time. This allows the data to reveal what actions are working and which are expending resources without an appropriate ROI. Too many changes at once makes it difficult to find which adjustments directly correlate to TCOR movement. 
  8. Consider TCOR components proportionally and in tandem. If premiums are high while risk control expenditures are low, a business may need to adjust its spending to try to drive premiums down over time through a greater investment in proactive control measures. 
  9. Be patient and understand that you may need to spend money in the short term for long-term savings. Changes to risk management are not always quick fixes. New programs and processes require investments of time and money before they can significantly improve a TCOR metric. 
  10. Risk is everywhere. TCOR numbers constantly change and usually represent a blend of controllable and uncontrollable costs. Even if a company achieves its desired TCOR, areas for improvement always exist to mitigate risk and manage costs. Adjust the target and keep working. 

How Do I Reduce My TCOR? 

TCOR metrics are unique to each business. However, one controllable expense impacts every component area of the score—claims. A good place for any business to start in lowering their total cost of risk is by eliminating unnecessary losses. Adding staff, especially in this tough hiring market, is not cost effective. That makes risk management software a scalable option that uses data-driven processes to mitigate risk. A powerful tool to implement is a COI tracking solution like myCOI

No business can eliminate risk entirely. However, they can transfer that risk to the external entities most likely to cause and control it. With myCOI, companies gain a software solution built on insurance industry logic that: 

  • Monitors vendor and contractor insurance compliance. The platform works to make sure third parties carry active insurance with the proper endorsements to protect companies from losses. 
  • Offers system-generated workflows ensuring end-to-end completion of the third-party compliance process with no detail falling through the cracks. 
  • Reduces administrative burden by automating compliance emails, storing contracts and insurance documents, and producing real-time data for assessing TCOR cost categories. Users report a 40% reduction in manual processes that commonly create errors.
  • Proactively assesses third-party risks and issues alerts before noncompliance becomes a costly claim or court case.

When it comes to TCOR, is your check engine light on? If so, let myCOI look under the hood. Our software is helping thousands of clients across the country increase compliance, lower claims, and produce a TCOR metric worth bragging about.

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