Total Cost of Risk

March 3, 2016

Widening the focus on risk.

Total cost of risk provides a holistic approach to reducing costs.

Any employer trying to control costs knows about risk and plans accordingly. Organizations buy insurance and try to keep claims at a minimum. But risk management shouldn’t end there. More and more employers and insurance brokers are forming strategies to address what’s been called the “total cost of risk (TCOR).”
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This concept helps get a handle on not just insurance premium costs but all the costs associated with a loss or claim. Some use the equation “premiums plus losses plus administrative costs” to define TCOR. But the idea is the same—bringing in all the costs of risk, even those that are hard to quantify. Lost productivity, time lost dealing with the claim, even damage to the company brand can be seen as part of a total cost of risk strategy.

For example, if a certain piece of equipment is crucial to a factory’s output, and the operator is injured and can’t work, the whole production line can be affected. A company in that situation could miss deadlines, lose orders, and lose customers. A problem like that can be devastating to a company; planning a strategy around TCOR could help soften such a blow.

Tools for implementing a total cost of risk strategy include analyzing claims data, improving corporate culture, and stressing prevention and training initiatives. Wellness efforts are also a part of this bigger picture. When an employee is injured, there are more than just insurance claims to consider. Lost productivity, the cost and time spent on replacement workers, and diminished morale can all be considered part of the total cost. By looking at all these areas, employers can minimize their costs when losses do occur. At the same time, these strategies can prevent losses from happening in the first place.

More than premiums
The first major point in adopting a strategy that covers the total cost of risk is to stop thinking that insurance premiums equal the cost of risk. Certainly, the monthly premiums you pay for property and casualty or workers’ comp insurance are a big number on your balance sheet. But this approach allows you to bring in other factors to the equation, costs you might not have been prepared for otherwise, such as administrative costs or the cost of lost time. 

For example, if an employee is injured, a manager might have to take time off to drive the employee to a doctor or ER. The manager will certainly have to spend time on paperwork and/or conducting investigative work related to the incident. That time lost is part of the total cost of that injury. It won’t show up on the balance sheet, but it is real nonetheless.

Solutions that go beyond finding an insurance product with the lowest possible premium to focus instead on the larger issue of risk prevention and management are better able to deliver value that affects your bottom line more dramatically. A low-cost premium that doesn’t cover an event that you are at risk for actually offers very little value. Looking at the total cost of risk helps employers identify potential losses before they occur. This approach is particularly important to smaller and medium sized companies, who have fewer resources and are therefore harder-hit when a big loss occurs. But all types of companies can benefit from a TCOR approach.

The big picture often starts with claims analysis
TCOR requires a more holistic approach to risk management. Looking at the big picture can include researching the experience of other businesses: what losses have they incurred, what could have been done to prevent them, what do past claims tell us about future risk? Experienced consultants have that knowledge at their fingertips and can help a company plan for risks that may be hard to predict, but are not unknown. 

In addition, employers, with the proper guidance, can begin risk-mapping. Like the example given above, most companies have critical control points, where a singular or seemingly small loss or problem might cascade into a series of larger problems with the company’s overall production. Risk mapping looks at a range of risk exposures, calculates probability and severity factors, and prioritizes which areas should be addressed first. Some companies have plans in place for issues that may not actually be a high risk or probability, and this approach would help them set more appropriate priorities. 

An example of this is the manufacturing company whose workers had occasional eye injuries and devoted considerable resources addressing those injuries. Upon examining claims data, it became clear that strains and sprains were more common and actually costing the company more. Certainly, the eye injuries were still important, but with the right data, the company could get more bang for its buck by focusing on strains and sprains.

By analyzing claims data, companies are able to get a better handle on what the highest risks are, which provides a much more stable foundation for planning. There is a multitude of ways that this can happen, on both the property and casualty and the health insurance side of claims. Claims data can show if employees are making too many trips to the ER due to on-the-job injuries, which is a sign that more training is needed. If claims data show costs due to issues with diabetes, weight loss classes and wellness efforts can be put into place. Using past experience (claims data) to shape future prevention is a smart and effective way to cut back on claims.

People can make the difference
TCOR also looks at company culture: is the company doing the right kind of training at the right time, does it stress safety and employee wellness, are employees focused on their work? At a time when many surveys find employees not engaged with their work, this is an area that is ripe for improvement—and effective steps will result in a safer, more productive workplace. Fewer claims and better employee satisfaction and loyalty are a natural result of good corporate culture. As an added benefit, healthy company culture also reduces turnover and recruitment costs.

Companies can also cut costs by instituting a good hiring policy: by making sure that potential employees are a good fit for your culture, you can ensure adherence to priorities like training, wellness, and safety. And an effective recruiting policy also helps with retention. Looking for job candidates who will value your priorities will save money down the road. 

The rewards of TCOR planning
Since these strategies look at more than just premiums, companies using this approach are more likely to effectively address risk and therefore reduce claims. And, when all other things remain equal, reduced claims deliver lower premiums. 

Just as importantly, strategies that look at the total cost of risk can help bring down your workers’ compensation experience modification factor (sometimes called e-mod or mod), the measurement used in calculating premiums. This is an especially important measurement for some industries like construction and manufacturing, since companies can lose business if their claims are above industry averages.

Strategies designed to affect your total cost of risk find and implement effective ways to prevent, reduce, mitigate and manage claims, which in turn can hold down premiums. And this can then lead to future additional benefits. Employers with reduced risk and premiums may be able to shift to high-deductible insurance plans or other alternative risk management programs like captives that cost less or provide substantial tax benefits.

Overall, TCOR offers companies a better, more comprehensive approach to managing the cost of risk. It also requires more attention to data analytics, corporate culture, and prevention efforts, but the benefits of such an approach are substantial.