Determining Your Entity’s Total Cost of Risk

This session at PRIMA’s 2018 Annual Conference featured the following speakers:

• Carleen C. Patterson, ARM-P, CIC, CRM – Managing Director – Public Sector – Aon
• Sheri Swain – Director of Enterprise Risk Management – Maricopa County Community College District

Carleen and Sheri walked through a detailed explanation of Total Cost of Risk (TCOR), it’s importance, and how to optimize your programs through this method during this session at the 2018 PRIMA Annual Conference. Focusing on reducing total cost of risk (TCOR) is fundamental to supporting your organization’s operational and growth strategies. While overspending to protect against risk makes little business sense, slashing risk management costs without first examining the long-term repercussions can be detrimental to operations as well as an organization’s bottom line.

What gets measured gets managed. Total Cost of Risk is an objective, quantitative method to calculate total cost of risk and measure risk management performance. Political, Business, economic, people, financial, natural are elements of the public sector risk universe. Define what is insurable and what is not. Think total cost of insurable risk.

The components of TCOR are risk transfer costs, retained losses, and administrative costs. Risk transfer costs include policy premiums, taxes, fees, possible retail and wholesale broker commissions. Ensure you are examining the broker partner relationships and if they are using intermediaries that can incur additional costs. Ask not only what markets will be considered but how the broker will access those markets. Cost of retained losses include costs within deductible, costs within retention, and costs for self-insured (bare) losses. Administrative costs include internal and external costs. Internal costs include risk management payroll, benefits, loss of productivity, and risk control (training, signage, safety equipment). External costs include brokers, TPAs, consultants, attorneys.

TCOR is the best measure of the actual cost of risk and a better risk management key performance indicator than premium costs. Premium cost + estimated cost of retained losses + risk management costs = total cost of insurable risk. This establishes the importance of your role and how it drives costs.

Optimizing TCOR is about balancing retention and risk control with premium. What drives your premium is your program design. Control risk transfer by examining program design, premium negotiation, loss modeling, cat modeling, property risk reports. Control claims cost by evaluating claims consulting, risk control consulting risk analysis, cost of risk allocation, analytics driven risk improvement, and engineering. Control administrative costs by understanding and responding to collateral analysis, cost benefit analysis, and tpa selection/management. By examining premiums and retention options along with loss trends, you can identity the most appropriate total cost of risk and related insurance program.

Controlling TCOR is primarily understanding what is driving your losses and how you are set up to manage response to those trends. Reducing through safety or loss control, having a strong claims management program, and understanding transfer options are some of the ways to do this.