Thursday, 2 August 2012
Risk managers call for TCoR to address more than insurance premiums
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.
Carol Fox, Director of Strategic and Enterprise Risk Practice at RIMS
The remarks were made at a panel discussion held to mark the publication of the annual benchmarking survey produced by RIMS, the US-based risk management association. The centrepiece of the survey is an industry-wide calculation of Total Cost of Risk (TCoR)—a measure designed to capture the expenses incurred in a risk management programme including insurance premiums, administration expenses and self-retained losses.
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.
The main finding of the 2012 RIMS survey, which examined 52,000 insurance programmes from 1.431 US-based organisations, was that the average TCoR increased by just 1.7% during 2011 from $10.02 to $10.19 per $1,000 of revenue—an unexpectedly low figure given the high number of natural catastrophes that occurred in 2011.
Although property premiums increased by 9%, the overall rise was described as ‘mild’ by the report’s author David Bradford, president of the research and editorial division at insurance research firm Advisen.
The survey also examined the extent to which risk managers use TCoR. It found that roughly half of those surveyed use TCoR as either a means of benchmarking the cost of their own insurance programmes or for reporting to senior management.
But despite the assertion by RIMS board member Kim Hunton that the association’s annual benchmarking survey has become ‘an essential resource for today’s risk professional’, the panel discussion suggested that more work needs to be done by the risk management community if it is to produce a standard statistical measure that truly reflects the cost of risk and can act as an effective benchmark.
“We need to get out of the insurance language mode and use the language that the people on the floor use so that they can understand what success and failure in a risk management context means and they understand how they can impact on that number,” said Richard Sarnie, Vice-President, Risk Management at the US-based Great Atlantic & Pacific Tea Company.
“We have to redefine TCOR and expand its meaning so that it includes all risk costs and not just the insurable ones. This is the first step that needs to be taken before we can come up with any kind of uniform definition across companies that will enable us to be able to assess our risk management performance against our competitors.”
Carol Fox, Director of Strategic and Enterprise Risk Practice at RIMS, supported Mr Sarnie’s view. “TCoR is really a measure of the total cost of insurance or retained loss coverage rather than the total cost of risk across all lines. We really want to focus on metrics around the expected outcome and the risk tolerance level.”
Advisen principal Jim Blinn defended the TCoR measure, stating that the collection of the data to create scores is still developing because it is not yet a universally accepted metric. “The approach to using TCoR still varies across organisations so we have not been able to collect all the data that we would like and be able to report back on that data.”
The comments from the panellists on the limitations of TCoR reflected a general theme—that risk managers and senior managers are increasingly concerned about the non-insurable risks they face. “Companies have been buying risk for over 300 years,” said Mr Sarnie. “By now, I think we’ve got it. So it is not insurance that is keeping senior managers awake at night, it is the uninsurable risks—reputation, supply chain, technology, social media. They want to know what tools we have, other than insurance, to monitor and manage these risks. The word insurance rarely comes up.”