Do you know your total cost of risk (TCOR)? It’s important to track this figure annually, especially if you’re trying to lower it.
Here are 7 things to keep in mind when reviewing your TCOR:
- When evaluating TCOR, remember it’s not just premiums. TCOR also includes self-insured losses, internal administrative fees, including collateral costs, and outside vendor fees, i.e. broker and third party administrator fees. Many brokers and consultants attempt to show total cost of risk as premiums only – but don’t be fooled! A reduction in premiums may actually result in a higher total cost of risk when losses and expenses are completely factored into your TCOR analysis.
- Total cost of risk is easily benchmarked against industry peers. TCOR is measured per $1,000 of revenue. By measuring TCOR against revenue you’re able to compare your program to similarly situated companies. Even if a true peer doesn’t exist, you can create a peer by weighting portions of your revenue base against relative industry peers. Benchmarking provides a great performance measuring stick relative to how you’re doing against your peers. TCOR is measured as Top Quartile, Above Median, and Below Median. Understanding your TCOR and your ranking helps identify savings opportunities.
- TCOR is like a balloon. When you squeeze on one bucket of cost, such as premiums or broker fees, other areas may start to look outsized, such as losses. By working on one area of TCOR, it exposes weaknesses in other areas of your risk management program. This will help you identify problem areas that need additional attention in the coming year.
- Once you’ve identified the now-bloated parts of your TCOR balloon, develop an annual TCOR roadmap. During your annual TCOR review, you should ask yourself: How are we doing? What can we improve? This roadmap will help you actively manage all four components of risk – premium, broker fees, administrative fees, and self-insured losses throughout your annual risk management process. Understanding your TCOR and building an annual roadmap will guide your risk management decisions throughout the entire year and keep you focused on improving your risk management profile.
- Consider all four components of TCOR proportionally and look at how they’re operating in conjunction with one another. If losses are low and premiums are high relative to benchmarks, there may be a need to retain more predictable losses and reduce annual premiums. If broker fees and premiums are high, there may be a need to undertake a true competitive process with your broker(s) and carriers.
- TCOR is a barometer of health for your risk management program. If your TCOR is significantly higher than peer benchmarks, its time to take action to improve your underlying risk management profile. All areas of the risk management process support a healthy TCOR. However, depending on the maturity of your risk management profile, different strategies may have differing abilities to move the needle on TCOR. Ultimately, if you have a strong risk management program, your TCOR should constantly be improving despite changes in the underlying business operations.
- Well-managed risk simply costs less. Most Risk International clients attain top quartile status and cut their total cost of risk in half within four years. All organizations should strive to become a top-quartile risk, Risk International can help you get there faster.