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What Is Total Cost of Risk?

By Alliant Specialty

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It is crucial for businesses to understand their Total Cost of Risk (TCOR) in order to make informed decisions about their insurance coverage. TCOR encompasses more than just the premium paid for a policy; it also considers the potential financial impact of risks that may not be fully covered. This includes deductibles, self-insured retentions, as well as indirect costs like lost productivity, reputational damage and legal fees in the event of a claim. By comprehensively evaluating these factors, businesses can develop a more accurate assessment of their overall risk exposure and tailor their insurance strategies accordingly. This holistic approach allows companies to strike a balance between securing adequate coverage and cost-effectiveness, ultimately ensuring they are protected while minimizing unnecessary expenses.

The Total Cost of Risk calculation is used by insurers to assess business risk, and it informs businesses in minimizing both exposure and premiums.

While having a strong risk management program is effective in reducing exposure, it's important to acknowledge that it might not cover all potential risks. If a business focuses primarily on insurance premiums to gauge risks, it may overlook other costs that are manageable from within the organization.  

The Relationship Between TCOR and Premiums?
Premiums are determined by several factors and one of them is an organization's TCOR. TCOR provides insights into the organization's approach to risk management and the potential financial impact of risks on the business, both seen and unseen. Generally, a lower TCOR signals effective risk management, which can result in more favorable premium rates, while a higher TCOR may lead to higher premiums due to higher perceived risk. It's important for businesses to focus on effective risk management to help reduce TCOR and potentially lower their insurance costs.

How Does TCOR Measure Risk?
Typically, there are four cost areas that are examined, measured and then analyzed to provide a TCOR calculation.

Direct Costs:

  • Insurance Premiums
    • The cost of insurance premiums paid to insurance carriers to cover various risks, including property, liability, workers' compensation, etc.
  • Deductibles and Self-Insurance Retention
    • The portion of losses that the organization agrees to cover before insurance kicks in.

Indirect Costs:

  • Losses and Claims Costs
    • The costs associated with actual losses or claims, including medical expenses, legal fees, settlements, etc.
  • Loss Control and Prevention Costs
    • Expenditures for safety programs, risk management strategies, employee training and safety equipment to prevent or mitigate losses.
  • Risk Management Department Costs
    • The operational costs of maintaining a risk management department, salaries of risk management personnel and related administrative costs.

External Costs:

  • Risk Transfer Costs
    • Costs associated with transferring risk to third parties, such as premiums paid for insurance, surety bonds or risk financing.
  • Risk Management Consulting Fees
    • Fees paid to risk management consultants for risk assessments, advice and guidance in managing risks effectively.

Opportunity Costs:

  • Lost Business Opportunities
    • Potential revenue or business opportunities lost due to risks or incidents affecting business operations.
  • Market Value Impact
    • The impact of risk events on the organization's market value, shareholder value or credit rating.

Analysis and Calculation:

  • Add up all direct costs (insurance premiums, deductibles, etc.).
  • Sum all indirect costs (losses, prevention costs, risk management department costs).
  • Include external costs (risk transfer costs, consulting fees).
  • Factor in opportunity costs and other intangible costs, if applicable.
  • Sum these components to calculate the TCOR for a specific period, such as annually.

How Businesses Benefit from TCOR
Understanding and calculating the Total Cost of Risk offers several benefits to a business, enabling informed decision-making and optimizing risk management strategies. This gives businesses several key advantages:

  • Holistic View of Risk Costs: Gain a comprehensive view of all costs associated with risks, including insurance premiums, deductibles, claims, loss prevention and indirect costs. This holistic perspective allows for more accurate financial planning and budgeting.

  • Effective Risk Management Decisions: Prioritize risks and allocate resources effectively to mitigate the most significant cost drivers. This facilitates informed decision-making to reduce risks strategically.

  • Optimized Risk Transfer Strategies: Evaluate the cost-effectiveness of various risk transfer options, such as insurance. Businesses can choose appropriate insurance coverage based on the risks with the highest TCOR to minimize financial impact.

  • Cost-benefit analysis of Risk Mitigation Efforts: Evaluate the return on investment for different risk mitigation strategies by comparing the cost of implementation to the potential reduction in TCOR. This informs decisions on the best risk management approach.

  • Improved Negotiations with Insurers: Present a clear picture of the business’s risk profile and request tailored insurance solutions that align with risk management goals.

By leveraging TCOR effectively, businesses take a data-driven approach to risk management, leading to more efficient allocation of resources, improved decision-making and ultimately better financial health and sustainability.  

How Can Alliant Help?
Alliant plays a pivotal role in helping businesses navigate the complexities of understanding their Total Cost of Risk. Our team of specialists provide expertise in evaluating policies, including hidden costs such as deductibles and self-insured retentions, enabling a comprehensive view of potential financial exposures. Alliant offers valuable insights into risk management strategies, helping businesses implement measures to mitigate risks and ultimately reduce their overall cost of risk over time.


Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.