Control the cost of risk

Risk management was once regarded as a routine task for the risk manager, with little or no connection to the company’s broader priorities. But, risk management has now become a key part of a broader financial management strategy and is linked to corporate priorities, making it more demanding and putting CEOs and CFOs in the spotlight.

“This new attention places increased reliance on good data around risks, risk controls, incident reporting and losses,” says Mike Theut, vice president of Aon eSolutions Group, a part of Aon Risk Services Central Inc. “You can’t manage what you can’t measure. The key to risk management is understanding risk needs and using insurance as a financial tool. If you don’t do this, you have a limited understanding of the overall risk costs in your business.”

Smart Business spoke with Theut 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 understand your risk objectives, strategy and profile, then deliver these using optimal mitigation, retention and a transfer risk management plan. This leads you to your total cost of risk — the risk costs incurred by a business, beyond the premium costs — to deliver an effective risk management strategy.

The main components of TCOR are insurance premiums (risk transfers), loss/loss prevention (claims) and expenses (internal and external risk management costs). TCOR is most often converted to a percentage of an operating value, such as revenue. This allows you to normalize the data for benchmarking your corporation from year to year and can also be used to benchmark your various business units.

How can you use TCOR to manage risks?

A risk management information system (RMIS) provides you with the quality data needed to track your TCOR components, prepare market submissions and define your optimal retention levels. 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.

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, understand how the different components interact and contribute to the total, and identify the best point between retaining risk and insuring it.

How can you identify the lowest sustainable cost of insuring the risk?

A RMIS containing the components of TCOR can give you the insight you need to focus on items you can control. A CFO may concentrate on expenses and efficiency improvements, while a risk manager may concentrate on risk transfer and retention costs.

TCOR reports consolidate these efforts and assist you with identifying the underlying root cause of losses, spotting trends and establishing best practices with internal benchmarking. Good risk management can be promoted with a structured cost allocation program, making the TCOR more accountable and visible to your business units.

How can you use a RMIS to better track data?

A RMIS helps you obtain the right data and monitor performance of control mechanisms, which leads to improved governance. It also leads to more informed risk management decisions, which creates a targeted approach to reducing TCOR.

A RMIS also gives you an integrated, enterprisewide view of your risk exposure and delivers critical risk management intelligence. Data from multiple external sources can be incorporated, as can data from internal systems, such as human resources and payroll.

With a RMIS, you can establish your risk information in an efficient manner and have a complete picture of your business at your fingertips. With the increased focus on driving down the cost of business, more and more companies are benefiting from using this solution.

What are the benefits of tracking your TCOR and risk management data?

Using a RMIS gives you greater awareness of your risk and more control of it, which results in a 3 to 10 percent savings on TCOR. You can see this in:

  • Improved insurance premiums and better quality data presented to the market
  • Efficient renewal processes through centralized data in a consistent structure
  • Development of loss prevention schemes through discovery of loss history trends
  • New workflow efficiencies, such as reduction of time for settlement of claims, issuance of new insurance policies, or record searches

With all eyes on budgets, such initiatives and improved workflows often enable the reduction of resources. Better quality data can help you identify innovative strategies for reducing costs. As businesses tighten their belts and start to make difficult decisions, you need to determine whether you can afford to not control your data and drive down TCOR.

Mike Theut is vice president of Aon eSolutions Group, a part of Aon Risk Services Central Inc. Contact him at (248) 936-5255 or [email protected].