Total Cost of Risk (TCOR) – What costs should be included, really, when determining your Cost of Risk when operating your business?

Many companies and business people relate the terms “insurance” and Risk Management (RM) as being nearly synonymous.  It is necessary to realize that this is like comparing a banana with a watermelon (everyone always talks about apples and oranges so I want to be different, OK?).

Insurance, often, is considered to be a means of RM.  However, it is a means of “Risk Transfer”, solely – transferring an identified or (in some cases) unidentified “risk of loss”.  What about that “bad debt” suffered because your customer – a manufacturer, for example – just filed for bankruptcy protection that was never anticipated or that sudden devaluation of currency and the impact on your cost of imports?  Risk Transfer to a 3rd party, as in an insurance company or other similar firm, e.g. captive, pool, futures market, hedge fund, etc. for means of reimbursing a loss, after it has occurred, or reducing the impact of a catastrophic incident are all effective means of RM but are not all insurance acquisitions.

What is RM, though?  Is it a method of minimizing or reducing a loss, all the time?

This is where TCOR is involved – determining the

  • “direct costs” involved with insurance (premiums, deductibles, retentions, etc.),
  • “indirect costs” (how much time and money is involved in preparing your claims reports, meeting with the lawyers and accountants, etc.?) and
  • “prevention costs” (those Health & Safety meetings should be included in your TCOR and the costs of hiring a new employee because you just terminated someone – oh, yes that may have also been a direct cost, too).

RM includes identifying and establishing your goals in business, differentiating them based on the “certainty of managing your risk” i.e. accidental vs. speculative, etc.  It may also involve outsourcing some (yes, Commercial Lenders even give their Loan Agreement Reviews to people like us to minimize their risk of error; Lawyers don’t always have all the answers regarding Contracts and must refer to us; Accountants don’t always have the best suggestions either and do call us) questions and/or routine work for which one is not adept at handling.  Taking steps to control those risks through various cost-effective means should involve someone with RM training and experience, from Financial to Information to Operational Risk.

Many insurance agents and brokers will attempt to fill this role but, unless being paid on a fee basis (as opposed to their earning a commission on the sale of those insurance policies to you), you may be placing him/her in the potential position of a conflict of interest, are you not?  How are you able to truly trust that individual to save you money (insurance costs may decrease but there is no guarantee) in the short-term or the long-term?   I have heard this comment on numerous occasions.

Have you ever argued with that insurance broker/agent over the added cost of improving your company’s security system, e.g. sprinkler upgrade, or the effectiveness of that Business Continuity Plan in reducing a Business Interruption claim and why you’re being charged such exorbitant (in your mind) premiums?

There may be excellent reasons and the insurance company may insist, or dispute, but why not request a 2nd opinion (better yet, why not ask for our help from the start)?

This is all part of TCOR!  Surveys have indicated that much of a company’s true Cost of Risk of being in business is “non-Insurance premium” and one major international insurance company’s survey results indicate that less than 50% of all business losses are reimbursed by insurance.

This is exactly my reasoning for the emphasis on TCOR, RM and the need for consulting with an expert in the field.

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2 Responses to “Total Cost of Risk (TCOR) – What costs should be included, really, when determining your Cost of Risk when operating your business?”

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