How to optimize your company’s total cost of risk while properly managing and measuring your risk data

Risk management was once regarded as a routine task for the insurance risk manager, with minimal connection to the company’s broader operational and financial goals. As the business world has grown more complex, so have its risks.

Today, it is an organization’s obligation to effectively manage risks by integrating risk management into corporate financial planning, objectives and solutions. The spotlight is now on CEOs and CFOs more than ever as risk management has become more demanding and focal for a company.

“This new attention places increased reliance on good data around exposures, risk controls, incident reporting and losses,” says Anne Sherwin, vice president and senior account executive of Aon Risk Services Central, Inc. “You can’t manage what you can’t measure. The key to managing risk is having a keen understanding of your company’s risk profile before determining whether or not to retain or insure the risk. If you don’t do this, you may face unpleasant financial consequences.”

Smart Business spoke with Sherwin 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 first establish your risk profile, objectives and strategies, and then convey these by using the optimal balance between risk retention and risk transfer. It requires that you know your total cost of risk — the risk costs incurred by a business, beyond just insurance premiums — to deliver an effective risk management strategy.

The TCOR is an equation that captures the total cost of self-retained losses, risk management administration expenses (internal and external) and insurance premiums. TCOR is often converted to a percentage of an operating value, typically revenue. It enables you to normalize the data for benchmarking your corporation from year to year, including benchmarking your various business units.

How can you use TCOR to manage risk?

By tracking your TCOR components, you’re able to determine your optimal retention levels. Further, 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. A Risk Management Information System (RMIS) is essential for your company to track your risk data, prepare quality market submissions and aid in defining your risk appetite.

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 by establishing how the varying components interact and contribute to the total.

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 results in a targeted approach to reducing TCOR.

A RMIS also gives you an enterprise-wide view of your risk exposure and delivers critical 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 maintain 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.

Better quality data can help you identify innovative strategies for reducing costs. As businesses tighten their belts and start to make difficult decisions, you decide whether your company can afford not to control your data and drive down TCOR.

Anne Sherwin is a vice president and senior account executive at Aon Risk Services Central, Inc. Reach her at (412) 594-7534 or [email protected].