How to optimize your company’s total cost of risk while properly managing and measuring your risk data

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Risk management was once regarded as a routine task for the insurance risk manager, with minimal connection to the company’s broader operational and financial goals. As the business world has grown more complex, so have its risks.

Today, it is an organization’s obligation to effectively manage risks by integrating risk management into corporate financial planning, objectives and solutions. The spotlight is now on CEOs and CFOs more than ever as risk management has become more demanding and focal for a company.

“This new attention places increased reliance on good data around exposures, risk controls, incident reporting and losses,” says Anne Sherwin, vice president and senior account executive of Aon Risk Services Central, Inc. “You can’t manage what you can’t measure. The key to managing risk is having a keen understanding of your company’s risk profile before determining whether or not to retain or insure the risk. If you don’t do this, you may face unpleasant financial consequences.”

Smart Business spoke with Sherwin about how to develop a successful risk management process, how to better track your total cost of risk (TCOR) and the benefits of tracking TCOR and risk management data.

How can a business develop successful risk management processes?

You have to first establish your risk profile, objectives and strategies, and then convey these by using the optimal balance between risk retention and risk transfer. It requires that you know your total cost of risk — the risk costs incurred by a business, beyond just insurance premiums — to deliver an effective risk management strategy.

The TCOR is an equation that captures the total cost of self-retained losses, risk management administration expenses (internal and external) and insurance premiums. TCOR is often converted to a percentage of an operating value, typically revenue. It enables you to normalize the data for benchmarking your corporation from year to year, including benchmarking your various business units.

How can you use TCOR to manage risk?

By tracking your TCOR components, you’re able to determine your optimal retention levels. Further, underwriters today are paying more and more attention to risk information, and buyers are looking to differentiate themselves to achieve the best price. Better information will allow you more leverage in the marketplace. A Risk Management Information System (RMIS) is essential for your company to track your risk data, prepare quality market submissions and aid in defining your risk appetite.

Based on a recent survey, only 44 percent of respondents tracked and managed all components of TCOR. And, while more than 90 percent tracked their transferred risk, only 74 percent tracked their retained risk.

Businesses with risk management departments are more likely to measure full TCOR. On average, TCOR is 1.2 percent of a company’s total revenue, so understanding, controlling and lowering this percentage can have a substantial financial impact. Have your CFO or risk manager identify the lowest sustainable cost of insurable risk by establishing how the varying components interact and contribute to the total.