Total cost of risk, or TCOR, is still not a widely used metric in the risk management field. I wonder why? Maybe because it is hard to derive and fully understand, and maybe it isn’t considered a fair measure of risk to an organization. Maybe a little of both.
It seems that what we often see presented as TCOR is actually the cost of INSURED risk, so maybe the proper term should be total cost of insured risk (TCOIR). What is usually presented as TCOR includes premium expense, cost of retained risk, claim handling and brokerage expense, actuarial fees and the like. But this is only the tip of the iceberg.
From a practical standpoint, the true total cost of risk should include the cost of legal fees and settlements, even for non-insured litigation loss. While on the subject, all of your contract review and compliance activities are risk expenses, too. While we are at it, we probably need to consider the cost of traditional occupational safety and health and environmental stewardship programs and projects in there, as well as the G&A expense of the Risk Management, Safety, Legal, Contracts/Compliance and Environmental Affairs departments. Whoa, what about the expense of the Internal Audit department and the activities of the Chief Information Security Officer, too?
When you stop and try to get your arms around all of the activity that goes on inside a company that is tied to the identification, measurement and control of risk, our traditional definition of TCOR does not hold up very well. It is much more straightforward to capture and report on the costs associated with the traditional risk transfer program and then use that as your internal benchmark over time, balancing with some meaningful business metrics such as revenue, headcount or other measures commonly used in your business.
Substituting TCOIR for TCOR is just easier for most organizations to digest, not only because it is more limited in scope, but also because it doesn’t require a whole new understanding of the definition of “risk,” which most organizations are not ready to adopt. No matter what you call it, TCOR or TCOIR, it is important to carefully and fully define what the number is and what it is made up of. Write it down. Talk about it. Make the term meaningful throughout the organization. Every company and every insurance program are different, so take pains to clearly define what you mean when you use the term at your firm, no matter if you call it TCOR, TCOIR or something else.
Some of the components in TCOIR might include:
- Risk transfer expense (insurance premiums) for property & casualty, specialty lines, employee benefit premiums, etc.
- Broker fees and benefit consultant fees
- TPA or other claim management fees
- Actuarial expense
- RMIS expenses (direct and indirect)
- Risk Management department G&A expense
- Retained losses (including actuarial accretion each year)
- Risk management consultant fees
- Fronting fees
- Captive management/accounting/legal fees and expenses
- Credit for:
- Reinsurance commissions
- Profit commission returns
- Premium refunds or return premiums on legacy programs
- Premium audit refunds