True Total Cost of Risk

There is a term used in Risk Management field, “Total Cost of Risk,” also known as “TCOR.” This is an important concept in the strategic planning process for making decisions about the purchase of insurance, the deployment of alternative risk programs, and setting retention levels. The traditional “Total Cost of Risk” number includes the following costs:

– Insurance premiums and fees
– Retention (losses below the threshold at which purchased coverage applies, or losses which are self-insured)
– The cost of risk management administration

TCOR is an important number to understand and make use of both for management of a specific company’s program, but also for comparing different business units, benchmarking, setting targets, and in the process of evaluating acquisitions, reorganization, and business process reengineering.

What I’d like to suggest, though, is that while you maintain a good understanding of the traditional sense of TCOR and your organization’s performance in that area, that you also consider a broader idea related to the big picture for risk costs. hence, the idea of “True Total Cost of Risk,” which is not a term with the same universal standard meaning as TCOR, but a very useful conceptual idea to help maintain and communicate a broader view of the implications of risk in organizations.

The idea behind “True Total Cost of Risk,” or “TTCOR” is that there are indirect, uninsurable, and peripheral costs beyond those three categories that may be hard to quantify, but have a definite and substantial cost impact on an organization.

The specifics of indirect accident costs deserve separate and detailed treatment, but are basically related to costs brought on by a loss that are not included in the claim costs, such as the costs of replacement workers or supervisor accident follow-up. These indirect accident costs are a major component of the TTCOT idea, but there is more.

You also might want to consider:

– Costs outside the risk management function in an organization per se that still relate to the administration of the risk management function. An example of this might be shared information technology, software development, or systems support functions.
– Time and effort involved in contractor selection and selection of replacement contractors, both for construction and non-construction purposes
– Impact on operations by constraints imposed by insurance policy conditions or limits (this is another potentially complex idea that also deserves more in-depth treatment)
– Hindrances or facilitation of the speed that new products or offerings can be brought to market by the efforts required to manage the risk of those new offerings
– Design, engineering, and planning costs resulting from code compliance, risk control, or liability reduction efforts

… To name a few. Understanding the breadth and depth of the impact of non-speculative risk of loss can help speed organizations toward their goals, and face fewer surprises down the road.

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