How to recognize, value and reduce your total cost of risk

While the term “total cost of risk” (TCOR) has become more common, not every business owner understands what components make up the TCOR and how to address these exposures, says Nate Bell, CIC, commercial insurance specialist at Zito Insurance Agency.

Basically, TCOR is the cost of the items that your business is responsible for, including insurance premiums, deductibles, uninsured losses and indirect expenses.

“While most business owners know what they pay in insurance premiums and deductibles, they need to understand all potential exposures, whether they’ve insured against those exposures or not,” Bell says. “A business should identify potential policy gaps and decide, ‘Do I buy an insurance policy or put in controls, such as risk transfer or a specific loss control procedure to mitigate that exposure?’”

Smart Business spoke with Bell about how to reduce risk in your organization.

How should employers identify their TCOR?

Start by asking questions to understand your areas of exposure, what’s already in place to cover your risks and the potential gaps that need to be addressed.

When doing an analysis, it’s important to remember exposures are both qualitative and quantitative. You want to understand your risk tolerance. Are you comfortable self-insuring with a large deductible, or do you want to buy insurance that will respond first dollar? Do you have claims frequently? Are incidents typically severe? 

The kind of controls and tools you have in place to minimize losses, your management team and staff, and the company’s claim history are all variables in determining opportunities to approach critical areas driving TCOR.

The loss history is important. For example, commercial automotive insurance premiums are rising drastically, but frequent, smaller claims can impact premiums more than one large claim. If your company has a frequency issue, you may be better off increasing your deductible and self-insure as much as you’re comfortable with, along with investing in telematics or other risk management tools to help reduce the frequency of claims.

What are some tips for designing a plan to eliminate, transfer or insure risks?

Your risk manager and/or insurance agent can help you:

  • Develop a continuity plan. A big exposure is business interruption coverage. Do you have enough coverage or a plan in place to minimize the expenses and get the business back up and running as quickly as possible when there’s a loss? 
  • Review and update policies and procedures, such as driver recruiting and cell phone policies for commercial vehicles. Another example is a return-to-work policy, one of the best ways to control workers’ compensation costs.
  • Have a solid employee handbook that’s up to date, reviewed by your attorney and signed off on by the employees is also critical. It not only helps minimize your exposure for liability claims of harassment, discrimination or wrongful termination, it can include training and policies that help decrease injury risk.
  • Transfer risk by having subcontractors include you as an additional insured on their policy for work they’re performing on your behalf. This is a key way to protect yourself without additional costs. 

How can organizations without internal risk managers better manage these costs?

Most small and mid-sized companies don’t have a dedicated person with expertise in risk management. One option is to hire a third-party company with the expertise to assist in the development of policies and procedures to help create a safe organization and establish controls to limit risk.

But don’t forget to utilize your insurance agent and your insurance company. Many agents provide loss control material on an ongoing basis, and most insurance companies have a strong Loss Control department that will provide training and risk management tools free of charge.

Every facet of an organization impacts a company’s TCOR. While reduction of TCOR typically starts with the CEO and management team, taking advantage of training and involving all staff members in utilization of resources can be key in reducing costs throughout the year.

Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.