Total Cost of Risk: Using Insights to Drive KPIs
In an earlier blog, we discussed how the Total Cost of Risk (TCOR) helps risk professionals be more strategic in managing risk. Being strategic is important for every organization, especially in challenging economic environments. The driving force of an organization’s success is the ability to execute strategies.
TCOR is the sum of insurance premiums paid, retained losses, self-insured retentions, and risk management administration expenses.
Savvy risk professionals use TCOR to support their organizations through risk-aware decision-making. This is a wise move, but risk professionals can take it even further to the next level. There’s a lot more opportunity for strategic risk management guidance once a decision is reached and the organization begins taking action. But what does that action look like in practice? The key is to relate TCOR to other organizational metrics that influence decisions and drive financial outcomes. These metrics vary by industry and even among organizations in the same industry.
TCOR and KPIs
Key performance indicators (KPIs) can vary significantly between organizations and industries. The KPIs that are important to track is dependent on the industry. Connecting TCOR to an organization’s KPIs creates a critical framework in which to understand the cost of risk and opportunities to drive more value. Some examples of industries and KPIs are:
Retail — sales per square foot. This metric gauges how efficiently retail stores use their sales space. Average sales figures differ, of course, by the types of products sold. A clothing and housewares store, for example, might have average sales per square foot of $200, while a store selling high-end electronics could see sales per square foot of more than $2,000.
Airlines — revenue passenger miles. This statistic is the product of the number of paying passengers and the distance traveled in miles. Delta Air Lines Inc. reported it had 237.7 billion revenue passenger miles in 2019, a figure that plummeted in 2020 to 73.4 billion due to the COVID-19 pandemic.
Hospitality — revenue per available seat hour. Food and beverage businesses typically measure their revenue based on the number of patrons they can serve over a given time or the average revenue per guest. Hotels consider revenue per available room.
Manufacturers — manufacturing cost per unit. Unit economics plays a key role in manufacturers’ pricing models. Knowing how much it costs to produce a unit is a vital KPI for pricing a manufactured good.
Using TCOR data, risk professionals can put their organizations’ KPIs into a risk management context. This enables risk managers to better protect revenue-generating assets and recommend risk mitigation strategies. Where unmanaged risks are causing reduced performance, insights from TCOR can potentially reverse the trend.
TCOR to the rescue
Here’s an example of how knowledge of the Total Cost of Risk can improve an organization’s financial results.
A big-box retail store chain with locations nationwide was seeing its average sales revenue per square foot decrease at several of its stores. The company’s risk manager analyzed the trend against its TCOR. She found that stores with declining revenue also had increases in claims – both for workplace injuries as well as slip-and-fall liability claims from customers. Knowing that higher loss costs would drive up the Total Cost of Risk and further reduce sales per square foot, the risk professional developed a loss control strategy. To implement the strategy, the risk management team visited each location with declining sales and advised store managers on how to improve worker safety and prevent customer slips and falls. In addition, a revised loss allocation program provided financial incentives to store managers and staff who reduced claims. This strategic application of TCOR using a KPI achieved multiple benefits: claims went down, store employees’ productivity increased, sales per square foot began increasing, and the company reduced its Total Cost of Risk.
Risk managers are often challenged to express their value in terms that matter most to the C-suite. TCOR is a great way to do that if it's tied properly to other organizational metrics.
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.