“What gets measured, gets managed!” This statement is the fundamental principle behind the concept of “Total Cost of Risk.” But what exactly is TCoR, and why should you as a risk manager care about it?

There is risk associated with everything we do in life. But in today's world, business risk must be quantified, including the expense of preventing events from happening in the first place.

The purpose of any risk management program is to control enterprise-wide risks, which will ultimately lead to a reduction of the total costs associated with these exposures.

Businesses assume costs of risk to operate. The question is, what is the dollar value of managing these risks, and how can you reduce it?

You can define “cost of risk” as a quantifiable, controllable number that can be identified and reduced. Simply put, it represents:

o The total cost of your insurance premiums, plus

o Retained losses (deductibles/uninsured losses), in addition to

o Internal/external risk control costs

By recognizing these costs, we can plan and implement management strategies to reduce them.

Most people assume TCoR is their insurance premiums alone. They are only partially correct, as premiums are just a piece of the puzzle. While insurance premiums are the most visible cost associated with risk, they are hardly the only expense.

There are many other costs associated with risk that are either not tracked or are viewed as fixed costs. That is the paradigm.

What most business owners don't realize is that these additional costs are controllable.

All of the costs related to risk can be tracked and monitored. In addition, there are operational strategies that can be implemented that will manage and ultimately reduce these costs.

In breaking down the components of TCoR, the first and most easily tracked is insurance premiums. This includes the amount an organization spends on insurance coverage and brokers' commissions.

The next element–retained losses–is the amount of money that a firm spends out of pocket for losses incurred. These are costs that fall within a company's deductible. (An example is a small mishap such as drycleaning a client's suit due to spillage from an employee.)

The next applicable costs may not be as easy to track but are still important components captured in the TCoR calculation. These are the costs needed to protect your employees or customers from injuries. (Examples are safety equipment, mats, warning signs, training, etc.) These costs should be tracked as part of the TCoR for your business internally.

The next component is money spent with professional firms to help you handle insurance or other risk-associated issues. These would include costs for an attorney to respond to a complaint or to review a contract's indemnification agreement. These are also part of the TCoR calculation and are considered as external risk control costs.

Other relevant costs are productivity declines due to injuries or losses. Having your employees spend their time either driving fellow workers to the doctor, investigating incidents, cleaning up spills, etc., are also costs that are risk-related and are taking away from your bottom line.

So, why do I care about TCoR? The answer is, “how can I not care?” All of the costs that I have discussed above impact the bottom line. By tracking TCoR and designing a customized strategy to control these costs, savings can be realized on the bottom line.

That means every dollar saved is a dollar of improvement in profit.

What can I do with this information? Once you have tracked all these costs for at least the last two years, what's next?

As a risk manager, I would go through each of the strategies that the business has in place to address each component. We would discuss how effective they have been and what we should do to improve them.

For example, if you are having slips and falls, spending more on safety may reduce your overall costs. My point is a dollar saved is easier than a dollar earned. These dollars are found money!

I cannot stress enough that any risk management program that does not look at the Total Cost of Risk is missing critical opportunities.

Richard W. Sarnie, CSP, P.E., is senior vice president and chief operating officer at The ALS Group in Upper Saddle River, N.J. He may be reached at rsarnie@als-uic.com.

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