There's Big Value in Recognizing the Total Cost of Risk

There’s Big Value in Recognizing the Total Cost of Risk

Taking risks is inevitable if a company wants to achieve objectives and grow. But business and risk are evolving more quickly than ever before. While taking the right risks can be invaluable, taking uncontrolled risks can create operational and financial challenges that make it difficult to compete. That’s why more businesses are paying attention to total cost of risk (TCOR) in order to control costs and make smarter decisions.

Companies are doing their best to manage risk, but new risks emerge every day. That’s why it’s critical to think about the whole picture of risk, not just insurance premiums and the direct cost of claims.

– Debbie Michel, Executive Vice President, National Insurance Risk Management, Liberty Mutual Insurance

TCOR approaches risk holistically and with a long-term lens, looking beyond just insurance premiums and the cost of claims. As an example, say a frozen food manufacturer’s delivery truck overturns. The driver suffers an injury, the vehicle has damages, and the product spoils. In addition to the workers compensation and commercial auto claims, the business incurs costs to dispose of the spoiled goods and to produce and deliver new product to the customer. If the business pays overtime or hires temporary help to complete the order, that is even more money out of pocket. This scenario makes it clear that the surface costs of losses aren’t the only factors in play when it comes to risk.

The payoff gets bigger

Managing TCOR helps an organization make well-informed decisions about the risks it takes. By running a safer operation that better protects employees, customers, and the public, a company can also save money on claims and other related costs. Finally, a TCOR approach can help a business:

  • Know where to invest. Exploring risk holistically — the obvious and the not so obvious— shines a light on where to invest time, money, and other resources for the highest returns. These returns can be invested in other areas, such as product development or customer service, to help the business grow.
  • Reduce direct and indirect costs. Going back to the delivery truck scenario, risk can have direct costs (such as claim payments) and indirect costs (such as overtime or temporary labor). Risk can also negatively affect a company’s productivity, service quality, and reputation, which could lead to lost business. TCOR helps companies better manage both direct and indirect expenses.
  • Choose the right program structure. By creating a plan to address risks and tracking results, a business can determine if its insurance program helps support financial goals. Is a fully insured program the right choice or would a large deductible or self-insured program combined with third-party claims administration make more sense?

Putting TCOR to work

In general, losses account for 85 percent of a business’ total cost of risk, while the remaining 15 percent goes to excess premiums and claims-handling charges. Focusing on these areas can help bring down TCOR. But how should a business do that?

Here are four steps a company should take to better manage TCOR:

  1. Measure your risk. It’s frequently said that you can’t manage what you can’t measure. Analyze underlying risks, trends, and exposures of your specific business:
    • Review loss trends over the past five years, including the frequency and severity of injury types.
    • Quantify the effectiveness of current safety and claims-handling programs.
    • Benchmark the company’s performance against that of its peers.
  2. Get buy-in. A good way to get everyone on board is to put TCOR into terms that CEOs, CFOs, and other decision-makers understand. For example, a manufacturer could express TCOR in terms of production, such as how much steel a company must sell to cover that expense. This cost-benefit analysis helps show that managing total cost of risk is a worthwhile effort that can help improve profitability.
  3. Make your plan. Once a company knows its current TCOR, it must figure out where it wants to go and how to get there. This is where risk control and claims management come into play. The plan should be specific:
    • Quantify the results the business wants to achieve.
    • Identify ways to improve safety. For example, a business could automate or modify certain work activities to reduce the risk of injuries.
    • Determine how to improve claims outcomes. For instance, a company could create a formal job modification program so employees can return to work sooner.
  4. Monitor and adjust. Regularly assess the effectiveness of your risk management efforts to see how the plan is working. If a new program isn’t making the expected impact, identify changes to help improve the outcome. If a program is working, could you implement it in other areas to drive even better results?

Getting started

A company that is interested in adopting a TCOR approach can maximize the benefits by closely working with its risk advisers and insurer. Brokers and insurers can support your efforts and provide:

  • Data, analytics, and experience to help uncover loss drivers and identify areas to improve.
  • Access to industry-specific benchmarks and risk-management strategies that have been successful for similar companies.

With a solid TCOR approach and partnership with its insurance broker and carrier, a company can do much more than manage claims — it can reduce costs, stay competitive, and improve overall business results.
