Understanding Total Cost of Risk
I am currently over in London, arriving Thursday morning had hit the ground running working with my colleagues as we introduce our on-line services into the United Kingdom. It is pleasing to see that the brokers here are embrassing it as did our Australian, New Zealand and South African clients.
While here I saw an article that surprised me. The heading was: Risk managers call for TCoR to address more than insurance premiums
I would explain that TCoR stands for Total Cost of Risk. The article read in part:
Risk managers are questioning the suitability of industry metrics used to assess the effectiveness of risk management programmes, suggesting that such metrics need to focus less on
insurance-related costs and be more reflective of additional factors such as the high cost of capital, rising interest rates and the increased need to provide collateral.
In theory the TCoR figure is designed to enable risk managers to compare their programmes against their peers, to present a figure to senior management that can be easily understood and also help them negotiate better rates when renewing their insurance programmes. However, the concern is that TCoR too often relates solely to the cost of insurance.
What surprised me is that people whose job it is to understand, measure and as their job title suggests manage risk should get the definition of Total Cost of Risk so wrong.
Premiums are clearly not the total cost of risk. Premiums are the cost of transferring risk from the Insured to the Insurer. There is a big difference.
As I explain in my book “It May Happen to Me! – the essential guide to general insurance”
In simplistic terms, the total cost of risk is made up of insurance premiums; commissions and fees paid; costs of risk evaluation and analysis; risk control; administration; uninsured or self-insured losses due to under-insurance; lack of cover; and the application of policy deductibles; as well as myriad of other indirect costs…..
As such, a saving in premium is not a saving in the cost of risk if the premium saving comes at the expense of insurance coverage that is needed by an organisation at the time of a claim. The problem for many buyers of insurance is that they do not fully appreciate the additional risk they are assuming through not understanding the insurance coverage they are actually purchasing.
While I speak here of organisations, it is equally as true for an individual.”
While I can understand an untrained Insured making this mistake, again say how surprised I am to see that European Risk Managers fell for this basis mistake. If you are only measuring premium as the total cost of risk and not bringing into the equation the cost of no insurance, under insurance etc you are in effect gambling with the balance sheet and income streams of the organisation.