Various Elements of Cost of Risk

Cost of Risk is a quantifiable, controllable number that can be identified and reduced. Simply put, TCoR is the total cost of your insurance premiums, retained losses (deductibles/uninsured losses) and internal/external risk control costs. By recognizing these costs we can plan and implement management strategies to reduce them.

Most people assume it’s their insurance premiums alone. They’re only partially correct: premiums are only a piece of the puzzle. While insurance premiums are the most visible cost associated with risk, they are hardly the only cost. There are many other costs associated with risk that are either not tracked or are viewed as fixed costs. That is the paradigm. What most business owners don’t realize is that these additional costs are controllable. All of the costs related to risk can be tracked and monitored. In addition, there are operational strategies that can be implemented which will manage and ultimately reduce these costs.

Elements of Total Cost of Risk

Insurance premiums

The first and most easily tracked component of Total Cost of Risk is insurance premiums. This includes the amount a firm spends on insurance coverage and brokers’ commissions.

Retained losses

The next element is retained losses. The retained loss value is the amount of money that a firm spends “out of pocket” for losses incurred. These are costs that are below a company’s deductible. An example is a small mishap such as dry-cleaning a client’s suit due to spillage from an employee.

Costs to protect employees/customers from injury

The next applicable costs may not be as easy to track but are still important components captured in the TCoR calculation. These are the costs needed to protect your employees or customers from injuries. Examples are safety equipment, mats, warning signs, training, etc. These costs should be tracked as part of the TCoR for your business internally.

Costs to engage firms for help with risk & insurance issues

The next component is money spent with professional firms to help you handle insurance or other risk associated issues. These would include costs for an attorney to respond to a complaint or to review a contract’s indemnification agreement. These are also part of the TCoR calculation and are considered external risk control costs.

Productivity loss

Other relevant cost is productivity loss due to injuries or losses. Having your employees spend their time either driving other employees to the doctor, investigating incidents, cleaning up spills, etc. are also costs that are risk related and are taking away from your bottom line.

Administration Costs

Financial impacts incurred in providing the services required to effectively administer a Total Cost of Risk Program. They include claims management, risk control and all other project costs such as data analytics. In the case where a firm pays additional fees or expense for these services, they are an addition to the TCOR formula. However, when they are provided by a third party (Insurance Brokerage or Risk Management Services Provider) as part of the relationship, they are a reduction to the extent that the measurable ROI exceeds the cost of the services.

Loss Costs

Loss Costs are generally broken up into 2 parts. The direct cost of the losses and the indirect cost of losses. Both of these items impact the organization’s Total Cost of Risk.

• Direct Cost of Losses: Deductibles and claims that are anticipated and funded inside the organizations risk financing program. (i.e. Captive, Deductible or Self Insurance Programs) In addition the cost of administering claims by third party administrators (TPA’s) are considered a direct cost of the loss as the TPA expense is usually a direct correlation of the claims experience. Any uninsured loss is also a direct cost of loss.
• Indirect Loss Costs: Every loss creates a corresponding expense that is unfunded and in some cases unanticipated. While the risk financing (insurance) may pay the known claim, there is a high correlation of additional unfunded business expenses that arise from virtually any claim. These loss costs are commonly known as The Iceberg. These are quantified and measured in an accurate Total Cost of Risk calculation. (For more on the subject of Indirect Loss Costs see the Wikipedia Indirect Loss cost topic)