Financial Leakage
Financial Leakage is an insurance buyer’s combined direct and indirect losses. Financial Leakage is the controllable, out-of-pocket expense currently eroding an insurance buyer’s operational or business efficiency.
All organizations suffer from the negative impact of unchecked Financial Leakage regardless of size (large, medium, or small) or type (for-profit or non-profit.) Organizations incur these hidden expenses when an insurance claim ripples through the organization, resulting in lost productivity, hampered growth, and operational disruption.
In many cases, Financial Leakage is an organization’s largest uncovered risk and delivers a significant un-budgeted drain on their financial performance.
These frictional or hidden costs are NOT covered by insurance carriers… the organization pays them.

Understanding Financial Leakage
Calculating Financial Leakage is a critical step in measuring an insurance buyer’s Total Cost of Risk. Failing to calculate the Financial Leakage inside a buyer’s insurance program will result in an incomplete picture of their TCOR.
Financial Leakage is the controllable, out-of-pocket expense currently eroding an insurance buyer’s operational or business efficiency.
So, what are the components of Financial Leakage?
The insurance costs for most buyers drop into one of two categories: Third-Party Costs and Financial Leakage Costs:
Third-Party Costs include the expenses associated with buying insurance (premiums, taxes, and fees) and are determined by a buyer’s effective policy types and claims experience.
Financial Leakage Costs include 1) the direct loss costs through retained costs, deductibles, and uninsured losses, and 2) the indirect loss costs including the unbudgeted expenses of loss events caused by disruption, reputational loss, hiring replacement workers, etc.
Losses are an insurance buyer’s largest source of Financial Leakage. They are controllable with the proper placement of risk control mechanisms.
The indirect loss cost component of Financial Leakage might also be called soft costs, frictional costs, unfunded costs, or hidden costs. Regardless of what these costs are called, calculating and identifying them is of critical importance.
brokers: today's metric and dashboard-driven buyer wants decision support for their risk management program. You can deliver that and more with our sales platform.Calculating Financial Leakage – The Formula
The Financial Leakage formula is:
Direct Loss Costs
+ Indirect Loss Costs*
= Financial Leakage
* To quantify the impact of the Indirect Loss Costs, a factor must be applied to the Direct Loss Costs. While there are many methods and philosophies for calculating indirect loss cost factors, most of them are outdated or significantly flawed. To calculate Financial Leakage and Indirect Loss Costs, many brokerage firms incorporate certified data from TCORCalc®, North America’s leading authority on risk management program analytics and insurance industry benchmarks.
A good rule of thumb is that the Financial Leakage adds an additional 30% to 50% on top of the risk financing (premiums) expenses**. So if a buyer is paying $100,000 in insurance premiums annually, you can expect their Financial Leakage to be in the range of $30,000 to $50,000 per year.
These hidden costs lurk beneath the surface and erode the buyer’s profits and hamper their business performance.
** Source: TCORCalc®
Controlling Financial Leakage
Mitigating a buyer’s Financial Leakage is critical to reducing their Total Cost of Risk.
There are significant opportunities to control and reduce a buyer’s Financial Leakage through proper risk control mechanisms.
The first step is to inspect and analyze the buyer’s existing cost structure for leakage points. You need to know where the problem areas are.
Then a broker or agent should focus on mitigating the Financial Leakage by delivering projects and services to manage the insurance program and lower the frequency, cost, and severity of losses. These projects and services might also be called resources or administrative programs.
The broker will look to impact the buyer’s TCOR through its recommendations, program implementation, and resource application.
Here are some examples of the industry-specific or specialty resources a broker (or agent) might deliver to reduce the buyer’s Financial Leakage:
- Claims Management
- Contract Review Services
- Driver Safety Program
- Forklift Safety Program
- Slip and Fall Prevention
- OSHA or DOT Compliance Programs
Demonstrating and Presenting Financial Leakage
Brokers and agents should be able to show a buyer how much Financial Leakage they are suffering inside of their insurance program.
The best way to do this is to show the buyer:
- A hard dollar assessment of the actual cost structure inside their organization, which will improve their budgeting and cost allocation activities.
- How these costs are impacting their business metrics and analytics (their profits, margins, or EBITDA, or budget surplus in the case of a non-profit).
Note: Presenting the Financial Leakage impact to a buyer in a rate per $1,000 of annual sales will provide a deeper analysis for budgetary decision support. This rate per $1,000 of sales method ties directly into today’s CFO or C-Suite’s dashboard-driven management strategies.
Examples of Financial Leakage (Property/Casualty)
- Lost Productivity
- Operational Disruption (e.g., hiring and training replacement employees)
- Management Interruptions
- Brand Reputation
- Turnover Expenses
- Asset Replacement
- Unfunded Legal Fees
