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Total Cost of Risk (TCOR) is the only accepted measurement of an organization's entire cost structure as it relates to risk. Total Cost of Risk is the sum of 4 major components that are individually measured and quantified. Risk Financing Costs, Loss Costs (Direct and Indirect), Administration Costs and Taxes & Fees.

History
The term Total Cost of Risk (TCOR) was first introduced in the Risk Management community in 1962. At that time Risk Management was an evolving discipline. The professional risk managers needed to create a way for them to translate their effectiveness in financial terms to the executive stakeholders of their organizations.

By creating TCOR, these Risk Managers were in a position to shift their operational costs from that of overhead to Return on Investment. In addition, it provided them the ability to translate their results to the C-Suite in purely financial terms that encompassed the entire costs and results of their efforts. Total Cost of Risk encompasses the major functions of any Risk Management or Brokerage organization. It provides both the users and providers of Risk Management services with the only accepted measurement of results and quantifiable impact.

Components
The four components of Total Cost of Risk are as follows :
 * Risk Financing Costs: These include all insurance premiums and attendant costs.  Attendant costs should include broker commissions or fees, captive contributions, dividend adjustments, letters of credit and any other items that impact the either the funding of transfer or retention of risk.
 * Loss Costs: These are generally broken up into 2 parts. The direct cost of the losses and the indirect cost of losses.  Both of these items impact the organization’s Total Cost of Risk.
 * Direct Cost of Losses &mdash; These include any deductibles and claims that are anticipated and funded inside the organization’s risk financing program.  (i.e. Captive, Deductible or Self Insurance Programs) In addition the cost of administering claims by third party administrators (TPA’s) are considered a direct cost of the loss as the TPA expense is usually a direct correlation of the claims experience.  Any uninsured loss is also a direct cost of loss.

Total Cost of Risk in its accurate form, includes the impact of all 4 components stated above. However, the term has been utilized by some organizations by simply showing the risk financing costs in addition to the direct claims cost. This version does not account for the indirect loss costs or impact of risk control or claims reduction.
 * Indirect Loss Costs &mdash;  Every loss creates a corresponding expense that is unfunded and in some cases unanticipated.  While the risk financing (insurance) may pay the known claim, there is a high correlation of additional unfunded business expenses that arise from virtually any claim.  These loss costs are commonly known as The Iceberg.  These are quantified and measured in an accurate Total Cost of Risk calculation.  (For more on the subject of Indirect Loss Costs see the Wikipedia Indirect Loss cost topic)
 * Administration Costs: These are the financial impacts incurred in providing the services required to effectively administer a Total Cost of Risk Program. They include claims management, risk control and all other project costs such as data analytics.  In the case where a firm pays additional fees or expense for these services, they are an addition to the TCOR formula.  However, when they are provided by a third party (Insurance Brokerage or Risk Management Services Provider) as part of the relationship, they are a reduction to the extent that the measurable ROI exceeds the cost of the services.
 * Taxes and Fees: These are the fees attached to the placement of the risk financing program. They are the various State taxes that become part of the insurance placements that are paid to governmental and regulatory bodies.  (i.e. State Surplus Lines or Admission Fees)

Formula
$$RF + LC + AC + TF = TCOR$$


 * RF = Risk Financing
 * LC = Loss Costs (Direct and Indirect)
 * AC = Administrative Costs &mdash; In cases where the administrative projects are provided as part of the Risk financing costs, the Administrative Cost is a cost reduction based upon the valuation of the services provided.
 * TF = Taxes and Fees

The Two Main Points of TCOR Comparison
Simply knowing the Total Cost of Risk for an organization is not the main usage of TCOR. In order for it to be meaningful, it must be applied in a non-static way. This requires the ability to apply it for comparison purposes from one period against another. The difference is either the increase or decrease of TCOR and becomes the TCOR results. In order to achieve this, 2 things must be taken into consideration:
 * The Comparison Period &mdash; The quantified change in TCOR can be calculated by comparing one period of time (the benchmark period) against a following period. (the comparison period) These two periods can be of unequal periods of time but must be adjacent to each other.
 * Sales or Revenue Per Period &mdash; TCOR is usually demonstrated by a rate per one thousand of sales. That allows an organization to compare TCOR over unlike periods of time.   For instance, a comparison can be made of 2 years against the following 3 years by using the total revenues in each period against the corresponding TCOR.

Purpose
TCOR is used by executives inside the financial and risk services industry in various ways:
 * Risk Management Professionals &mdash; TCOR provides them with an accurate analysis of their cost structure. These are used in the allocation of expense throughout an organization by business unit or location.  Also, TCOR is the basis of determining the return on investment to the organization.
 * C-Suite Executives &mdash; Through the analysis of TCOR using comparison years, the C-Suite can accurately budget their costs and review their increase or decrease of cost structure. This information is used to accurately budget.
 * Brokerage and Risk Services Providers &mdash; Total Cost of Risk is the only way that a brokerage or other risk services providers can demonstrate the quantifiable impact of their services to buyers. The valuation of Loss Costs/Indirect Loss Costs and the impact of risk control and claims management projects provide the impact.

TCOR Analytics
In 2012 the use of TCOR became a much more important metric and analytic tool. With the emergence of cloud computing and data analytics inside a business organization. As the C-Suite moved closer to making decisions based upon analytic results, Total Cost of Risk became the key metric of evaluating their risk financing / claims / risk control program. This occurred by pairing their Key Performance Indicators (KPI’s) such as EBITDA, product margins, shareholder valuation and many other productivity KPI’s with the comparative TCOR results. That provided the C-Suite the ability to analyze the quantifiable impact of TCOR as regards their important established KPI’s. Thereby judging the effectiveness of their providers inside their specific organizations. Some uses of TCOR when paired with an organization's KPI’s are :
 * Predictive Analytics Using Past TCOR Performance &mdash; The ability to construct historical TCOR results over many years and predict forward looking results.
 * Accurate Analysis of Current Cost Structure &mdash; By embedding TCOR inside product, Cost of Goods or negotiated contracts.
 * Premium Performance Metrics &mdash; The evaluation of several past year’s premium results to establish a metric of change versus industry results.
 * Risk Control Efficiency &mdash; TCOR is used to analyze the effectiveness of risk control projects by comparing the TCOR before the projects versus the TCOR during or after the completion.
 * Risk Services Provider Analysis &mdash; The quantitative analysis of the financial impact of various Risk Services providers over a period of time. This is especially true in the evaluation of brokerage firms or third party providers.