Total Cost of Risk

Total Cost of Risk – Definition

Total Cost of Risk or (TCOR) is the only accepted measurement of an organization’s entire cost structure as it relates to risk.

Components of Total Cost of Risk

Total Cost of Risk is the sum of 4 major components that are individually measured and quantified. Risk Financing Costs, Loss Costs (Direct and Indirect), Administration Costs and Taxes & Fees.


Risk Financing Costs

Risk Financing Costs include all insurance premiums and attendant costs. Attendant costs should include broker commissions or fees, captive contributions, dividend adjustments, letters of credit and any other items that impact the either the funding of transfer or retention of risk.


Loss Costs

Loss Costs are generally broken up into 2 parts. The direct cost of the losses and the indirect cost of losses. Both of these items impact the organization’s Total Cost of Risk.

  • Direct Cost of Losses — Deductibles and claims that are anticipated and funded inside the organization’s risk financing program. (i.e. Captive, Deductible or Self Insurance Programs) In addition the cost of administering claims by third party administrators (TPA’s) are considered a direct cost of the loss as the TPA expense is usually a direct correlation of the claims experience. Any uninsured loss is also a direct cost of loss.
  • Indirect Loss Costs — Every loss creates a corresponding expense that is unfunded and in some cases unanticipated. While the risk financing (insurance) may pay the known claim, there is a high correlation of additional unfunded business expenses that arise from virtually any claim. These loss costs are commonly known as The Iceberg. These are quantified and measured in an accurate Total Cost of Risk calculation. (For more on the subject of Indirect Loss Costs see the Wikipedia Indirect Loss cost topic)

Administration Costs

Financial impacts incurred in providing the services required to effectively administer a Total Cost of Risk Program. They include claims management, risk control and all other project costs such as data analytics. In the case where a firm pays additional fees or expense for these services, they are an addition to the TCOR formula. However, when they are provided by a third party (Insurance Brokerage or Risk Management Services Provider) as part of the relationship, they are a reduction to the extent that the measurable ROI exceeds the cost of the services.


Taxes and Fees

The taxes and fees attached to the placement of the risk financing program. They are the various State taxes that become part of the insurance placements that are paid to governmental and regulatory bodies. (i.e. State Surplus Lines or Admission Fees)


Calculate TCOR – The Formula

The Total Cost of Risk Formula is as follows:

Risk Financing
+ Loss Costs (Direct and Indirect)
+ Administrative Costs*
+ Taxes and Fees
= Total Cost of Risk

*In cases where the administrative projects are provided as part of the Risk financing costs, the Administrative Cost is a cost reduction based upon the valuation of the services provided.


Uses of Total Cost of Risk

TCOR is used by executives inside the financial and risk services industry in various ways:

  • Risk Management Professionals – TCOR provides them with an accurate analysis of their cost structure. These are used in the allocation of expense throughout an organization by business unit or location. Also, TCOR is the basis of determining the ROI to the organization.
  • C-Suite Executives – Through the analysis of TCOR using comparison years, the C-Suite can accurately budget their costs and review their increase or decrease of cost structure. This information is used to accurately budget.
  • Brokerage and Risk Services Providers – Total Cost of Risk is the only way that a brokerage or other risk services providers can demonstrate the quantifiable impact of their services to buyers. The valuation of Loss Costs/Indirect Loss Costs and the impact of risk control and claims management projects provide the impact.

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