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Lowering the Total Cost of Risk (TCOR)

According to one of our recent surveys, lowering the Total Cost of Risk (TCOR) is a primary goal of all Chief Financial Officers and Risk Managers. Are you using all of the latest tools and services to gain the greatest understanding of your key drivers of risk costs? Are you obtaining a technical awareness of the key causes and conditions of your program?

Answers to these questions require a very deliberate process beginning with a review of several important concepts.

Risk Appetite

Are you aware of the amount and type of risk that your organization is prepared to take to meet its strategic objectives? Every organization has different capital structures and goals for the future. A risk appetite a few years ago may be completely different now. One of the most difficult tasks of any CFO and Risk Manager is determining the risk appetite of the organization and gaining a consensus from senior management and the board of directors.

Optimal Cost of Risk Retention and Transfer

By analysing your organization’s Cost of Capital, and applying your Internal Rate of Return (IRR) to the risk retention and transfer calculations, you will better understand how to proceed toward an optimal risk management strategy. Ideally, the IRR of your off-balance sheet risk protection (a hedging contract or insurance policy for example), and the risk you retain on your balance sheet (deductibles or self-insured expenses) should be greater than your Cost of Capital.

So, are each of your Risk Profiles optimizing the organization’s Risk Appetite and Cost of Risk Retention and Transfer? By measuring the current status of each Risk Profile with a technical awareness of the primary causes and conditions of expected losses, the management team and board will be able to question and “play” with various options that will project the best future optimal total costs of risks.

While this exercise may seem to be difficult or a waste of time, it is essential for optimizing a modern ERM TCOR financial picture. Generally, upon commencing a Total Cost of Risk program optimization project, the total costs of risk are likely to be reduced 10-30% in the first few years, then stabilize to “normalization” thereafter. Having a stable TCOR will allow you to optimize other areas of the enterprise for cost reduction and stabilization while maximizing revenues.

For a free application to “play” with your key TCOR variables now and in the future, please click here >>

Blackburn Robert

By Robert J. Blackburn, Managing Principal, Blackburn Group, Inc., contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..

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