How to Effectively Manage Total Cost of Risk

Organizations often have difficulty pinpointing their total cost of risk (TCOR) and understanding that a large percentage of this cost is actually within their control. The extra effort to know your organization’s metrics is worthwhile in order to drive effective risk management strategies that reduce expenses, improve margins and manage volatility.

Figuring out TCOR can help organizations better manage the risks they face in an ever-changing business environment. Yet many North American risk managers aren't calculating TCOR, despite how vital it can be to an organization's financial management.

Organizations calculate total cost of risk in many ways. A comprehensive approach factors in the total amount of retained loss costs, risk transfer premiums and administrative costs, as well as the cost of services to assess, mitigate, and manage all aspects of risk. For many organizations, the retained claims costs are the vast majority of their TCOR, yet managing these costs is not prioritized as high as managing traditional insurance premiums.

To effectively manage TCOR, risk managers should have a broad understanding of how the metric works and the detailed cost-savings opportunities that can be identified can help prepare for an uncertain future.

Gather Data to Determine Trends

Clean, consistent and properly categorized data will help organizations assess where hidden costs exist and what emerging risks are present. Risk managers should ensure that all business units apply the same standards to data collection and share them evenly across the organization.

Claims data and insurance program information can illuminate how organizations approach risk within their retained loss costs. The data falls into seven broad buckets that can be objectively diagnosed to develop insights and drive actionable strategies:

Insurance and Risk Financing Programs: Core components within this element of TCOR include premiums, coverage details, program structure including deductibles/retentions and limits, and collateral.

Retained Loss Costs: Overall performance in retained loss costs and impact on key financial objectives and volatility can be measured actuarially using the organization’s loss development pattern and benchmarked over time as a rate to exposure such as payrolls.

Loss Prevention: The process of recognizing, avoiding or minimizing the casualty related risks within an organization. The balance of prioritizing loss prevention and workplace safety with post-loss strategies is critical and true evidence of best-in-class risk management. The organization's safety team plays a vital role in collecting data to develop trends and insights to drive appropriate safety programs and process improvements, such as ergonomics, fall prevention and motor vehicle accidents. Often, the safety department and the risk management organization do not use the same performance metrics and strategies are not always aligned.

Claims Process: Understanding the depth of available claims related data crystalizes the many cost "leakage" elements to target. The claims process function includes the management of claims reporting, expenses, indemnity and medical payments and claim duration (the number of claims closed as a percentage of the total claim count). Early claims closure often results in lower claim costs, reviewing legacy claims that can be resolved and removed from the balance sheet, and minimizing other claims that potentially develop into more substantial liabilities.

Disability and Medical Management: When an employee is injured in the course of employment, successful management helps control claims cost, temporary disability days and safe return to work.  This is an important aspect of claims management but more importantly contributes to a healthy employee/employer relationship. Collecting this data and executing a formal Transitional Duty Program that fits an organization's culture safely after an accident is truly a best practice.

Litigation Management: Workers’ compensation litigated claims are growing in both frequency and severity, driving an increasing percentage of overall claims costs. Organizations can identify cost savings with litigation management and avoidance strategies by determining which firms provide the greatest value and litigation outcomes and measuring the effectiveness of defense counsel compared to costs.  Retrospective and prospective modeling details "leakage" and potential savings based upon actual performance.

Performance Tracking: It is critical to measure the outcomes of the cost-containment programs in order to demonstrate progress to your organization, business partners and insurers. Relevant dashboards and scorecards provide risk leaders a tool to identify cost savings opportunities and monitor the performance of pre- and post-loss TCOR mitigation strategies. Performance tracking broadens the ability to implement solutions to support a continuous improvement model and creates "actionable analytics" to help organizations lower costs.

Understanding the dynamics of these trends can help risk managers control the TCOR for their organizations. This is not a one-off exercise, but a continuous improvement journey to update cost trends as the business environment and related threats change in real-time.

Adjust as the Organization Evolves

By consistently measuring and managing the total cost of risk, organizations can adjust their risk management strategies to mitigate emerging threats and negative trends. The TCOR looks beyond the obvious costs to give organizations a detailed overview of the various expenses associated with each risk component as well as the opportunities for continuous improvement. 

Organizations that know their total cost of risk are empowered to strike a desirable balance between risk retention and risk transfer. The TCOR is a moving target that requires regular updates to continue to be useful for risk managers. Organizations that use a thorough method for managing TCOR will be better positioned to face an uncertain future.