Total Cost of Risk: Insights from the First Risk Manager to Use It
There recently has been a lot of buzz around the concept of Total Cost of Risk (TCOR) on LineSlip’s blog, and for good reasons. This metric is a valuable tool in helping risk professionals become more strategic in assisting their organizations to make better-informed risk decisions. Even though we fervently want more risk managers to make use of TCOR in the future, we thought it would be informative to look back at how this concept was first implemented in a corporate setting.
Douglas Barlow, the first risk manager inducted in the Insurance Hall of Fame, is widely credited as a risk management innovator who created the first global insurance and risk management program in 1962. Considered to be the first person to use the title “risk manager” in a corporate operations setting, Barlow introduced the concept of “cost of risk” in 1966.
As Barlow defined it, cost of risk was the sum of insurance premiums, self-funded or retained losses, risk control expenses, and other administrative costs related to managing risk. This is nearly the same definition of Total Cost of Risk (TCOR) that risk professionals use today.
Part of the beauty of TCOR is its versatility. The metric can be used in any industry.
Douglas Barlow is considered to have been the first risk professional to apply TCOR to corporate risk management. He was the risk manager of Massey-Ferguson, a Toronto-based multinational manufacturer of agricultural equipment. Using cost of risk and comparing it to Massey-Ferguson’s assets and revenues, he was able to see his organization was highly dependent on and incurred liabilities from several critical manufacturing plants around the world. Barlow instituted a loss prevention program to reduce Massey-Ferguson’s cost of risk and developed a sophisticated international insurance program, one of the earliest examples of a risk transfer technique widely used today.
In the mid-1990s, the Risk & Insurance Management Society (RIMS) began conducting an annual Benchmark Survey of members’ TCOR. The RIMS survey expresses Total Cost of Risk in dollars per $1,000 of revenue in various industries, enabling risk managers to compare their organizations to industry peers and analyze cost of risk by line of business, such as property, liability and workers compensation.
A saying attributed to Barlow underscores the importance of managing risk strategically: “All management is risk management.”
From his retirement in 1972 until his death in 1998 at age 91, Barlow mentored many risk professionals. His impact on the profession cannot be overstated, and a lasting legacy of Barlow’s innovations is TCOR.
LineSlip’s TCOR Launch
LineSlip will be launching our TCOR dashboard in the coming weeks. Sign up to be part of our mailing list so you can get more information about the launch event.