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Crunch the Numbers | Total Cost of Risk

What Really Adds Up to TCOR
You’re my hero! Have you ever said that when someone did a simple favor like loaning you an umbrella during a storm or holding the door when your hands were full? I’m sure you appreciated the gesture, but were their actions truly heroic (which can be defined as brave, courageous, valiant, superhuman, etc.)? It’s become common practice in the English language to overuse words and phrases to the point that we dilute their value and begin to misuse them.

In the risk management field, “Total Cost of Risk” has become a popular phrase, but its overuse has watered down its meaning and, unfortunately, it’s not always used equally. From a risk analysis standpoint, this is troubling because many people are missing key components when evaluating Total Cost of Risk (TCOR) and, as such, their analyses can be flawed. If you want to evaluate and understand the true cost of your business risk, it’s important to understand what components help define TCOR. We’d like to offer a case study to illustrate how these can be analyzed and used to measure business financials.

Total Cost of Risk

A Case Study – Company A
Company A employs roughly 1,500 employees in a mostly clerical environment across multiple states. The organization experienced a significant multi-million dollar loss, which we capped at $50,000 to limit that loss from distorting this analysis. The $50,000 figure was used because Company A’s Chief Financial Officer indicated that this amount was approximately how much money was spent internally trying to resolve the claim. We utilized proprietary software from TCORCalc to compile the data.

The Analysis
We compared company data from 2011 to 2014 against data from 2014 to year-to-date (YTD) 2017. When performing a TCOR evaluation, we always compare multiple years so that one particularly good or bad year doesn’t distort the numbers. This report used revenue as the key analysis point and was broken down into the following core categories of TCOR: risk financing, loss costs and administration costs. Let’s review each category.

Risk Financing
Risk financing calculations involve compiling the pure premiums for each respective time period and dividing that number by the revenue for the same time period. For Company A, the earlier time period resulted in a rate of $6.82 per $1,000 of revenue. The most recent time period had a rate of $5.31 per $1,000 of revenue, indicating an improvement of $1.51 in risk financing cost. Based upon Company A’s revenue, the analysis estimated a reclaimed financial leakage of $250,743 – a fairly positive result.

Loss Costs

Loss costs calculations involve actual losses (both direct and indirect). These numbers include any self-insured deductibles or retentions, which are often overlooked in TCOR analyses. The numbers for the earlier time period reflected a rate of $2.67 per $1,000 of revenue, and the most recent time period generated a rate of $0.79 per $1,000 of revenue. Again, the numbers revealed a significant loss improvement between the two time periods, which can largely be attributed to better prevention and loss mitigation efforts. The difference in improvement was calculated at $1.88 per $1,000 of revenue, and based upon Company A’s revenue, the reclaimed financial leakage was $312,183.

Lost Cost Rate Impact

Administration Costs
Administration costs can include a number of different line items, but most often this calculation involves the resources that a broker applies to servicing an account. These costs can be related to marketing, loss control, claims management and mitigation, quality control procedures, special projects, etc. They can be the broker fees or, if on a commission basis, a credit against the commissions. For Company A, the administration cost was a credit against commissions. The earlier period generated a rate of $0.35 per $1,000 of revenue. When compared against the most recent period’s rate of $0.91 per $1,000 of revenue, the numbers indicated that the services provided by the broker increased substantially between the two time periods. Company A had utilized additional broker services to help control costs, leading to a rate increase of $0.56. Based upon Company A’s revenue, this increase translated into a financial gain of $92,291 in administration costs received.

All of this data was ultimately used to measure the TCOR by adding up all the key components of cost. For Company A, the summation is a cost for the earlier time period of $9.14 per $1,000 of revenue versus the most recent time period of $5.19 per $1,000 of revenue. The cost savings were $3.95 per $1,000 of revenue, and based upon the insured’s revenue, this equated to real dollar savings of $655,916 over a period of two and a half years. This translated into a cost reduction of 43.22%, which had a significant impact on company profits. These savings could be used by Company A to reinvest in the business or increase shareholder value to the owners.

Knowledge is Power
Far too often TCOR analyses lack in-depth data comparison, and premiums frequently serve as the basis of cost savings. This narrow approach only captures 20% to 25% of a company’s true risk expense. The best methodology is to measure 100% of the costs in order to effectively manage expenses and positively impact company profits. Don’t settle for a diluted analysis when it comes to reviewing your company’s risk portfolio. We recommend that you partner with a Certified Analytical Broker (CAB) who fully understands TCOR and can provide a high-level, comprehensive evaluation. Doing so can help you gauge the overall health of your organization and take control of risk, giving you the power to move forward in a positive direction.

¹ “XpertHR Top 10 Compliance Challenged for 2017.” November 2016. Accessed on June 15, 2017 at
² “How to Reduce Employment Practices Liability Claims.” Inc.Com website. Accessed on June 15, 2017 at

This article originally appeared in the 2017 | ISSUE TWO of the SilverLink magazine, under the title “Crunch the Numbers.” To receive a complimentary subscription to the SilverLink magazine, sign up here.

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