Total Cost of Risk (TCOR) – What Does It Mean to You?
The term Total Cost of Risk (TCOR) means something different to each organization depending upon the risk management philosophy and leadership. The definition has expanded to include the cost of risks matching individual profiles that are self-insured, insured and uninsured.
Understandably, most boards and executive teams want to know how risks are being identified and managed. With increased emphasis on more strategic risk management, TCOR has expanded to include a comprehensive set of costs including predictive exposure and loss modelling, loss control resources, compliance, claims, and insurance. The days of adding up all the insurance premiums, claims, and allocated costs to come up with the total cost of risk are long gone.
Now, sophisticated risk management budgeting allocations are being developed to associate a myriad of risk costs into the picture. For example, the costs associated with risk modelling, monitoring, planning and compliance are being added to TCOR to address the primary strategic concerns of the board. Recently, TCOR has typically consisted of the following categories.
1. Insurance Premiums
2. Direct Loss Costs – all self-insured or un-insured losses retained by the organization
3. Indirect Loss Costs – all losses associated with lower profits or productivity
4. Risk Management Administration Expenses – including both internal and external expenses
From our recent surveys of boards and senior financial management, the concept of TCOR continues to be valuable to account for risk costs so that the organization may:
1. Benchmark the costs (flexibly) against similar organizations
2. Benchmark allocated risk expenses against other internal costs allocated to products and services
3. Summarize risk management policies, procedures and appetites
During 2016 and into the future, expand your thinking about TCOR to address the key strategic risk matters your board and executive team are most concerned about. If you are a senior financial executive with no internal risk management staff, be sure to address this important subject with outside resources such as your accountant, attorney and insurance broker to establish an appropriate Total Cost of Risk for your organization. Stay tuned for more news about this important subject in 2016.
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