Why You Need to Understand Total Cost of Risk
Risk exists everywhere, and for many churches and not for profits, it may seem unavoidable. It’s often assumed that the cost of risk only involves the insurance premiums paid, retained losses and administrative costs. However, total cost of risk encompasses much more than that.
One way to discover all the risks facing your organization — including ones that might not be seen, considered or addressed — is to examine the total cost of risk (TCOR). TCOR is the total cost of the items that organizations are responsible for, such as insurance premiums, retained losses in the form of deductibles and uninsured losses, indirect cost of claims and administrative costs. Other factors include:
- Transaction costs
- Loss of reputation
- Additional training
- Claims reporting and investigation
Over time, an organization’s TCOR can provide a form of measurement for assessing how risk-related costs are changing relative to the overall growth rate of the church or not for profit.
If only focused on insurance premiums as a way of quantifying risk, you may be missing costs that you have more control over. For example, premiums may be the least controllable cost, as insurance rates are often determined by outside forces such as weather-related events, the stock market, interest rates and the insurance marketplace.
Furthermore, the benefit of decreasing premiums is negated if an organization sees an increase in the indirect cost of claims and administrative costs. True cost reduction is most impacted by lowering indirect costs, which can cost more than the actual claim itself. TCOR helps identify those costs.
How TCOR Works
TCOR is measured per $1,000 of revenue. By measuring TCOR against revenue, you can measure the progress your safety and risk management programs make in reducing internal costs over time. Many organizations use TCOR to:
- Increase productivity and efficiency
- Reduce costs across the entire organization, not just insurance premiums
- Get a better idea of any inconsistencies in the organization’s risk management approach
Tips for Utilizing TCOR
Consider the following tips when evaluating TCOR:
- Use a basic framework to break down costs into component categories such as insurance premiums, service provider costs, risk transfer costs and safety department expenses.
- Identify existing costs for each risk category expressed as a percentage of overall revenue.
- Establish targets for each category for future years.
- Remember it’s not just about premiums; TCOR also includes self-insured losses, internal administrative fees and outside vendor fees.
- Work on one area of TCOR at a time, as this helps expose weaknesses in other areas of your risk management program and identifies problem areas that need attention.
- Consider all components of TCOR proportionally, and examine how it’s operating in conjunction with each other. If losses are low and premiums are high, there may be a need to reduce annual premiums and retain more predictable losses.
If you’re interested in evaluating the total cost of risk for your not for profit or church, contact us!
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