Managing the Total Cost of Risk
In the not too distant past, the concept of total cost of risk (TCOR) was mostly applied to fortune 1000 companies. Those companies whose insurance premium spend is significantly into the seven-figure level, carry large deductibles and have complex metrics for losses, expenditures and risk-related costs. These companies typically have full-time risk managers, safety directors and provide quarterly reports to a BOD.
Considering insurance costs typically rank among the top four operating expenditures for any size manufacturing or recycling company, it’s not surprising that this concept has shifted to the middle market sized businesses over the past several years.
TCOR is most simply defined as insurance premiums + deductible cost + administrative (and indirect) costs. What’s important to note is that these costs are controllable.
With further investigation, business owners and CFOs are realizing the cost of insurance is only one aspect of TCOR. The cost of deductibles, uninsured losses and internal or soft costs of losses are real and dramatically increase the TCOR number. When business owners can credibly measure TCOR, they tend to be motivated to invest into a more effective risk management effort. A properly focused risk management effort will provide a very significant ROI, both short- and long-term.
Risk management includes the evaluation of insured risks, uninsured risks, safety management, employee wellness, appropriate transfer of risk to vendors/suppliers as well as creating the ability to evaluate and measure results. Each of these activities can provide a significant cost reduction and a reduction in risk to the organization.
As an example, a business that invests in improving safety management can reduce the experience mod and workers’ compensation premium. Additionally, cost reduction can be calculated in the savings related to indirect cost of accidents (that are prevented). For a business operating at a 10% margin, a savings of $25,000 will have the same impact as $250,000 in new sales.
The concept of TCOR may appear complex for businesses that have not yet considered this, but it’s simply a more complete way to calculate cost related to one aspect of the business. Organizations of all sizes employ strategies related to growing their top line revenue or minimizing their expenses.
Contact us today if you’re interested in safety and claims management, risk transfer and the creation measurements for key areas of risk cost. Just have a question? We’re happy to answer it.
- Effective Claims Management Webinar Replay
- Calculating and Communicating Your Safety ROI
- Deductibles: Controlling Risk and Cost
- Safety E-Book
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