What are Your Key Drivers of Total Cost of Risk (TCOR)?
Last month we presented the results of our recent survey of Chief Financial Officers, Chief Risk Officers and Board Directors regarding the use of the Total Cost of Risk (TCOR) metrics. The respondents found TCOR tools are helpful in balancing the costs and benefits of an effective risk management program.
Depending upon the size of the organization, certain components of the Total Cost of Risk (TCOR) formulas were more important to them. During the studies, predictive modelling helped us separate the underlying drivers of risk costs based upon standard revenue rankings and industrial codes. The results provide clarity about the composition of costs associated with specific risk profiles.
For instance, we studied the characteristics of Middle Market (defined as organizations having revenues $10 Million to $1 Billion) and Large ($1 Billion+) organizations to determine if there is similar risk cost segmentation occurring at each level of grouping. The Middle Market was further segmented into Lower ($10 - $50 Million), Mid ($50 - 500 Million), and Upper ($500 Million - $1 Billion) categories for comparative purposes.
Remarkably, the level of risk assumption and transfer were similar for each organizational size level. However, within each market segment there were significant differences in how the enterprise risk management program was administered, along with the correlated composition of risk costs. For relatively smaller organizations in the Middle Market category of $10-50 Million in revenues, we observed much more dependence upon insurance as a means of managing the enterprise risk management program. The larger organizations (or those organizations with unique or complex risk profiles in all categories) had relatively smaller dependence on insurance. The cost of insurance for larger companies was more dependent upon availability, and the expected catastrophe exposures, for their individual risk profiles.
An important finding of our survey revealed that more strategic risk management is important to all senior managers and board directors. We have observed that the costs associated with risk modelling, monitoring, planning and compliance are being added to TCOR to address the primary strategic concerns of senior managers and the board. For smaller organizations, strategic risk analyses may be a relatively smaller annual cost for quick studies to be sure all areas of risk are being addressed. For larger organizations, more sophisticated ongoing studies are being conducted to test various risk assumptions given the fast paced changes that are occurring in all aspects of risk management.
In an upcoming article, we plan to address the traditional components of TCOR and how they affect each of the revenue size categories. Later in our series, we will explore some of the new areas being added to the TCOR calculation. Are you interested in a free Total Cost of Risk (TCOR) Estimate? Please click here >>