What is Total Cost of Risk?

TCOR is a metric that represents all costs associated with risks in an organization. Think of it as a comprehensive measure that accounts for every dollar your organization spends to manage, mitigate, and transfer risk. While insurance premiums are part of TCOR, they’re just one piece of the puzzle.  TCOR goes beyond premiums to encompass a wide range of costs, including retained losses, risk control costs, administrative costs, third-party costs, and indirect costs.

For each organization, the cost components will likely be different.  But by capturing the full spectrum of risk-related costs, TCOR offers a comprehensive approach to managing risk within an organization.

While the formula seems straightforward, gathering the necessary data can be challenging. Sources used in the TCOR process can include:

• Claims data for insured and self-insured losses
• Financial statements and invoices for administrative, third-party and indirect costs
• Budgets for safety programs, compliance initiatives, and other risk control measures

How to Use TCOR to Manage Risk

TCOR is most effective when approached as more than just a financial metric. Ideally, the cost components should be updated frequently.  Regular monitoring of TCOR transforms it from a static number into a dynamic tool for continuous improvement. By maintaining an up-to-date understanding of their total cost of risk, organizations can anticipate challenges, identify opportunities, and make data-driven decisions that support their long-term success.

Organizations gain visibility into the true cost of risk by actively tracking TCOR, which is critical for prioritizing resources and managing risk efficiently. This visibility helps identify high-cost areas, such as increasing claim frequency or inefficient processes, and allows for targeted safety programs or process improvements. TCOR also supports data-driven decision-making, enabling organizations to evaluate the financial impact of different risk financing strategies, such as adjusting retention levels or negotiating insurance terms. 

Additionally, by monitoring TCOR trends over time, organizations can proactively manage risks, anticipate challenges, and ensure alignment with their risk appetite and business goals. Ultimately, TCOR not only helps control costs but also enhances the organization's ability to make informed, strategic decisions that balance risk and reward effectively.

Strategies to Manage TCOR Effectively

Reducing TCOR requires a multifaceted approach, involving risk control, risk transfer, and data-driven decision-making.

Risk control measures are essential to managing TCOR effectively. These strategies can help prevent, minimize or mitigate potential risk and losses.  By proactively managing risks, organizations can prevent losses before they happen, ultimately lowering retained losses and insurance premiums.

TCOR is invaluable in guiding risk financing decisions as well.  By understanding the true cost of retaining risk versus transferring it to an insurer, organizations can make more informed decisions and calculate the breakeven point where the savings from lower premiums outweigh the increased costs of higher retention levels. 

Because TCOR aggregates all risk-related costs, it helps organizations make more informed decisions on what the impact of a particular decision or initiative might be. TCOR provides a financial perspective on risk management, making it a powerful tool for decision making and strategic planning. 

For example, TCOR can be used in deciding if an investment in a particular program or changing the organization’s deductible is a good investment by looking holistically at all costs that can impact such a decision.  By aligning TCOR with the organizational goals, executives can make informed decisions that support growth while managing risk.

Challenges of Tracking TCOR in Spreadsheets

While spreadsheets are widely used for TCOR tracking, they come with significant limitations. TCOR is a dynamic metric, and static spreadsheets simply aren’t built to capture its full complexity.

Tracking TCOR isn’t just about ticking off boxes; it requires a thorough understanding of risk costs, frequent updates, and a centralized view of risk data. Using spreadsheets to manage TCOR can pose significant challenges, particularly for organizations with complex risk profiles. Spreadsheets require manual data entry, which increases the likelihood of errors and inconsistencies, and lack real-time updates and integration with external data sources, making it impossible to continuously monitor dynamic changes in risk costs.  Overall, spreadsheets are time-consuming, error-prone, and ill-suited for the sophisticated demands of effective TCOR management.

To address these issues, many organizations are turning to automated systems or RMIS platforms. Tracking TCOR in a centralized system offers significant advantages over traditional methods like spreadsheets.  Systems can provide real-time updates, ensuring accurate and up-to-date data while reducing manual errors through automation. They can consolidate data from various sources into one platform, enabling comprehensive analysis, trend identification, and scenario modeling with advanced analytics tools. Additionally, they allow for proactive decision-making by providing actionable insights and linking TCOR data to other risk management functions, such as claims and exposure tracking. Overall, systems enhance efficiency, improve data integrity, and empower organizations to align TCOR management with strategic goals.

Additionally, one of the most exciting developments in risk management technology is the advancement of artificial intelligence, data analytics and predictive modeling. Managing TCOR in advanced systems such as a RMIS allows for integrating these tools with your TCOR strategies.  

Conclusion

Total Cost of Risk is more than just a financial metric, it’s a strategic tool that provides a comprehensive view of an organization’s risk exposure and guides decision-making.  When using and actively monitoring TCOR, companies can not only reduce costs but also enhance their risk resilience and support their long-term objectives.

While tracking TCOR in spreadsheets can be the easy solution, adopting a RMIS or automated system can provide results in real time, enabling organizations to focus on making impactful decisions rather than merely “checking the box.”

Ultimately, the goal of tracking TCOR isn’t just to say you’re managing risk—it’s to make informed decisions that drive the success of your organization. As the risk landscape continues to evolve, so should the ways we understand, manage, and leverage TCOR to achieve business goals.

About Patrick O’Neil

Patrick O’Neill is the founder and president of Redhand Advisors. He is a widely respected thought leader in RiskTech with more than three decades of experience in risk and insurance management information systems and claims management systems, integrated risk management solutions and other risk focused technology solutions. He founded Redhand in 2015 to help organizations maximize their investment in risk technology and to help develop and incubate innovative solutions to meet market needs.