Public Entity Total Cost of Risk in a Challenging World

An effective risk management program has always relied on experience to predict the future.  In today’s world, however, unprecedented challenges around insurance market trends, nuclear verdicts, ransomware attacks, civil unrest claims and inflation cost increases make future predictions difficult. In a global insurance market, a U.S.-based insured in the Midwest is no longer immune to hurricanes in the Atlantic, wildfires in the West or earthquakes in Asia. Domestic insurance carriers are reinsured by international insurance carriers or have sister companies that are impacted by these global events.

While so many of these challenges are beyond an individual risk manager’s control, the focus should be on those risk elements we can control.

Often, conversations with clients focus on broker fees and insurance premiums to quantify the success of an insurance program, however those are only two elements making up an organization’s Total Cost of Risk (TCOR). The International Risk Institute (IRMI) defines Total Cost of Risk  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, and administrative costs."

In these times, examining all individual elements of your organization’s TCOR is more important than ever—including underlying forces driving these costs. All TCOR components work together and should not be considered in a vacuum. For example, insurance market pressures are not the only thing impacting premiums. Analyzing what is driving claims and implementing appropriate risk control methods directly impacts claim frequency and severity, which in turn directly impacts insurance premiums.

Breaking down Total Cost of Risk

Measuring your risk management program's success based on premiums alone does not present a full picture, especially if you see increased claims or administrative costs. For most of the public sector clients we work with, premiums and broker fees make up only a small portion of overall TCOR. What your entity pays within the retentions, as well as costs from outside vendors like brokers, third-party administrators, appraisers or actuaries, should also be part of the TCOR evaluation. Administrative costs related to loss control for training, inspections and other safety measures also need to be considered. 

In addition to “What’s the final premium?”, there are other questions to ask: 

• Are you retaining appropriate retentions? How are they being calculated? As a way of controlling premium costs, many entities are either considering or forced to take higher deductibles or retentions. Does the premium credit offset the potential impact in retained loss costs resulting in short-term savings for potentially higher claim costs later?
• Are your participating carriers admitted or non-admitted? Non-admitted carriers result in additional charges for surplus lines taxes and fees.
• How are carriers being accessed - direct or through an intermediary? If an intermediary is being used, there is additional compensation built into the premium for that intermediary.
• What additional services are included in the carrier premium or broker fee? Any included services can reduce administrative costs and should be considered when comparing programs.
• Are you using a third-party administrator? How are they being compensated? Flat fee? Per claim charge? Life of claim? Are services bundled?
• Are you using an actuary to forecast your expected losses within your retention or deductible? How is the actuarial firm being compensated?
• What other internal costs is your entity incurring, such as payroll, benefits, loss of productivity, additional risk control costs for training, signage and safety equipment to reduce claims costs.

Once these costs, and others, have been identified, TCOR can be measured per $1,000 of revenue. Identifying existing costs for each risk category expressed as a percentage of overall revenue makes your risk management program's progress easier to compare with prior and future years.

In a time of unpredictability, when public entities are paying out millions in response to catastrophic property losses, expanded presumption laws and tort reform, considering all aspects of your organization’s changing exposures and TCOR is necessary.

Please reach out to Alliant Insurance Services, Inc. for more information or for help in evaluating your total cost of risk.