IRMI defines the total cost of risk (TCOR) as "the sum of all aspects of an organization's operations that relate to risk, including retained (uninsured) losses and related loss adjustment expenses, risk control costs, transfer costs, and administrative costs." Business owners should keep in mind insurance remains important for transferring risk and protecting their balance sheet. Total cost of risk encourages business to look at risk management on an integrated basis.
What items are included in the calculation of your total cost of risk?
1. Insurance Premiums: This is the amount you pay your insurance company for coverage through an insurance policy. Included in this calculation would be the various types of insurance you purchase as well as any fees you pay.
2. Self-Insured Losses: Not all losses will be covered by an insurance policy as the amount may fall under the deductible. When this happens a business is required to pay in order to fix or replace damages.
3. Risk Management: How much is professional advise costing you? Legal and risk management advise should be utilized by every organization. Whether it be hold harmless contracts or engineer inspections these costs should be considered.
4. Precautionary measures: Sometimes a business needs to take extra precautionary measures in order to prevent accidents from happening. Many business purchase safety equipment or post signs to warn visitors of any dangers in which they might be held liable. A "wet floor" sign would be a common example of this.
5. Other: Training and miscellaneous risk expenses should be considered when calculating the total cost of risk. It might not always be an obvious choice but activities such as cyber awareness should be considered.
Every business should understand their total cost of risk and be aware of how they are allocating their expenses.
The Base Team
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