Total Cost of Risk: A Firm Foundation for Strategic Risk Management
It’s easy for risk professionals to fall into a routine of tending to everyday issues in their organizations, especially during difficult times like these. But that comes with a downside: It prevents risk managers from focusing on a more strategic approach to managing risk.
Being more strategic is imperative for all organizations as they grapple with economic uncertainty, rising inflation, and other financial strains. For risk professionals, adopting a strategic approach is critical to widening their influence and optimizing risk management programs. Protecting people and assets never ceases to be important, but it can be even more challenging during difficult market conditions, when organizations are compelled to scrutinize expenses, including insurance costs. It’s easier for risk managers to make a case for additional funds when they align with strategic risk management objectives. How can risk managers do their jobs more effectively and adopt a strategic mindset in challenging times? A solid foundation for strategic risk management is Total Cost of Risk, or TCOR.
What is TCOR?
TCOR is more than just a valuable metric for budgeting; it also can enhance the role of risk professionals in their organizations. TCOR represents the sum of insurance premiums paid, retained losses, self-insured retentions and risk management administration expenses. Knowing their organizations’ Total Cost of Risk can elevate risk managers’ contributions from everyday operational risk mitigation to strategic support through risk-aware decision making.
TCOR offers a snapshot of an organization’s spending related to risk management activities. This data is dynamic, like risk itself, and it changes over time. With TCOR data in hand, risk professionals can have more informed conversations with senior leadership in their organizations. Decisions made with an understanding of TCOR can help businesses align their strategies with their risk tolerances. In this way, TCOR can serve as a bridge from pure operational/hazard risk management to strategic risk management that serves the whole enterprise.
How TCOR Can Improve Decision Making
Here is an example of how TCOR can inform decisions about managing risk: XYZ Manufacturing Company is planning to introduce a new line of industrial products that it envisions as a source of long-term profitable growth. XYZ estimates it will need to build an additional 100,000-square-foot production facility and hire 50 more employees to launch the product line. The new facility is valued at $15 million, and the additional workers will increase payroll by about $2.5 million annually.
XYZ’s risk manager, Jane Smith, utilizes LineSlip Solutions’ platform to keep track of the company’s risk management and insurance programs, and she can see at a glance XYZ’s TCOR before the planned product launch. Knowing this data point enables Ms. Smith to confer with XYZ’s insurance broker and develop forecasts for the additional cost of property insurance, business interruption, general liability, cyber liability, product liability and workers compensation – which XYZ already purchases for its existing operations.
Having its Total Cost of Risk at hand via Ms. Smith not only gives her a seat at the table, but it enables XYZ’s leadership to consider whether the risks – and risk management expenses – of the new product line are within the organization’s risk tolerance. XYZ can use the data to determine whether to increase its retentions to reduce insurance costs, as well as invest more of its budget for administering the risk management program.
This clear picture of TCOR affords XYZ Manufacturing a more strategic view of risks and expenses relating to its operations and lets it set spending targets more accurately for its growth plans. In addition, the company likely values Ms. Smith’s knowledge and advice even more now that she has established herself as a strategic partner.
LineSlip’s TCOR Dashboard
LineSlip is currently beta testing our TCOR dashboard with a select group of existing clients. Starting this fall, the TCOR dashboard will be added to our core offering—at no additional charge through the end of 2022. For more information on how LineSlip Solutions helps risk managers track TCOR, please reach out here.