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'Total Cost of Risk' Redefined

Risk managers, often seen mostly as insurance buyers, have work to do in expanding their view of risk to match those of senior executives and board members.
Caroline McDonald, CFO.com | US
July 30, 2012

The risk-management profession needs to expand the definition of total cost of risk (TCOR) beyond the insurance-based context it has traditionally focused on, risk-management experts said during a Thursday webinar.

From an insurance standpoint, TCOR is generally defined as premiums + retained losses + administrative expenses. But today senior executives and boards think of risk in much broader terms, and risk managers need to see themselves as more than insurance buyers.

"We need to redefine TCOR and get it out of the insurance language of premiums and losses," said Rich Sarnie, vice president of risk management at the Great Atlantic & Pacific Tea Co. "We need to expand it and make sure it includes all the risks and the costs associated with those risks, not just the insurable ones."

Executives are much more focused on risk management these days, but "it's not the insurable risks that are keeping them up at night. It's other risks," said Sarnie. Such risks include the availability of affordable financing, reputational risk, supply-chain risk, and technology or social-media risk. Boards "want to know how we are identifying those risks and how we are managing them, plain and simple. The word insurance very rarely comes up," he added.

Carol Fox, director, strategic and enterprise risk practice at the Risk and Insurance Management Society, agreed: "CFOs don't think of total cost of risk as what we're measuring." While insurance remains important for transferring risk and protecting the balance sheet, Fox said, companies are trying to strengthen their overall risk-management capabilities with an eye to overcoming obstacles to reaching organizational goals. "They're looking at what their strategic plans are and how those play into risk scenarios," she said.

Fox noted that boards of directors are most focused on strategic risks and want more information but less data. "They are getting a lot of data but not necessarily good analysis," she said. The trend is for oversight of risk management shifting from the audit committee to a dedicated committee.

Meanwhile, average TCOR increased to $10.19 per $1,000 of revenue in 2011, up 1.7% from the 2010 level of $10.02, according to the RIMS Benchmark Survey, released in late June, which included risk managers at more than 1,000 companies.

Despite high insured losses in 2011 (estimated at $116 billion by Swiss Re), the property-casualty industry remains overcapitalized, exerting downward pressure on rates, according to the survey, produced by RIMS and Advisen Ltd.

 




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