Total Cost of Risk Explained

Total Cost of Risk Explained

Every facet of your organization affects your total cost of risk. Regardless of the type of business you run, many find it difficult to quantify their true total cost of risk because it includes both pure and speculative risk. The impact negative publicity would have on your revenue is much harder to calculate than insurance premiums or lost productivity due to equipment downtime. But both qualitative and quantitative analysis is important. Why? Because your total cost of risk is synonymous with price – the price of your risk management program.

That’s why ALIGNED Insurance takes a total cost of risk approach by tailoring your risk management program to look to the endgame – your price. To help organizations better understand their total cost of risk and achieve their risk management goals, we help you to:

• Analyze your exposures
• Implement control measures to those exposures
• Determine risk transfer or financing options
• Manage current and future exposures

Qualitative & Quantitative Total Cost of Risk Factors

As part of our risk management interview process and total cost of risk analysis, we look to confirm that your risk management approach supports your overall business objectives. Simply put, as a business owner, what keeps you up at night? If that concern happened, how would your income or cash flow be affected if there were unforeseen depletion of capital, loss of a key asset, a shutdown of the plant, etc.? Discussing the qualitative aspects of your business provides the important details needed to solidify the game plan to your end game – price. Exposures are both qualitative and quantitative. Analyses into both offer the foundation for developing forward-thinking approaches to those exposures and assessing total cost of risk.

What is your viewpoint on risk? Is your company risk-averse? Is it in a financial position to take on more risk instead of transferring that risk to another party or contractually to a carrier? To help determine your risk aversion, it helps to assess your company history. For example, if you are a start-up company, cash flow and funds are typically tight, so you are more likely to be adverse to risk to protect the financial viability of your start-up organization. Conversely, if your company has a 20-plus year history, there are also risks, including becoming obsolete, stagnant or too conservative with your business plan.

We also look at the “hard numbers” and prior losses to identify trends in your performance and total cost of risk calculation. We also analyze losses to identify the following:

• Average incurred costs per loss
• Total incurred trends
• Top loss drivers
• Locations with high-frequency issues
• Fraudulent behaviours
• Reporting lag time
• Frequency vs. severity ratios

All of these factors and others need to be taken into consideration in the structuring of an appropriate insurance and risk management plan and to achieve our mutual goal of minimizing the total cost of risk.

An ALIGNED Advocate can provide expert guidance about calculating and minimizing the total cost of risk in your business. Talk to one of our advocates today about how we can help you secure the best products, services and business insurance solutions.