In insurance terms, total cost of risk refers to the cost of both pure and speculative risk. It is equivalent to the cost of your risk management program. For example, how do you estimate losses in the event of a union strike? This scenario is difficult to quantify at best. In contrast, other components of your risk cost, such as insurance premiums or claims for on-the-job injuries, are easily calculated.
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Managing your total cost of risk should be an essential component of running a transportation or warehousing company. And The Safeguard Group, Inc. can assist you. Your risk management program’s structure should be based on the endgame – your price. To achieve that goal, we assist you in the following ways:
Examine your exposures
Control measures for those exposures should be implemented.
Determine risk-transfer or financing alternatives.
Manage current and potential risks.
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What keep you awake at night?
We confirm that your risk management approach supports your overall business objectives as part of our risk management interview process. We’d like to know what keeps you awake at night. If that were to happen, how would your income or cash flow be affected if there were unexpected capital depletions or a shutdown? Discussing the qualitative aspects of your business provides the critical details required to solidify your game plan for your endgame—price. There are both qualitative and quantitative exposures. Analyses of both provide the foundation for developing proactive approaches to those risks.
What is your take on risk? Is your organization risk-averse? Is it financially able to take on more risk rather than transferring it to another party or contractually to a carrier? We ask you questions to determine where you fall on the risk spectrum.
Furthermore, we consider transportation industry norms, as well as your market position and competition, to tailor your risk management solution to the changing needs of your business.
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The qualitative interview is supported by quantitative analysis. To identify trends in your performance, we look at “hard numbers” and prior losses. We also examine those losses to identify a number of variables, including the following:
Costs incurred on average per loss
Trends in total expenses
Top loss generators
Locations with a high frequency of problems
Reporting time lag
Ratios of frequency to severity
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Our thorough analysis will reveal opportunities to approach the critical areas that are driving your total cost of risk. We will seek to identify the root causes of these issues and implement control measures to reduce exposure.
Control Measures Before and After Loss
Identifying exposures directs our resources to the most effective control measures. Claims account for approximately 75% of commercial insurance expenses. Through pre- and post-loss control measures, we hope to control and reduce this percentage.
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A thorough loss control evaluation identifies your strengths and weaknesses. There may be strong management leadership behind an initiative, but there is no employee buy-in or participation. The Safeguard Group, Inc. can help you set up a safety committee and deliver a comprehensive employee safety education campaign to address your risks.
Total cost containment requires an active loss control program and post-loss procedures. Many post-loss or total cost containment strategies exist, including the following:
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Putting in place a proactive and effective return to work program
Offering employees, a bank of modified duty jobs and informing the doctor that modified work is available
Contacting a local occupational medicine clinic. Interview the staff and tour the facilities to learn about their services. Invite the doctors into your company for a firsthand look and understanding of your operations. They can accurately evaluate reported injuries to confirm if they are work-related if you provide them with details about your operations.
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Fraudulent claim behaviour can cause risk costs to spiral out of control. The following are some anti-fraud strategies:
Through payroll stuffers and worksite posters, employees are being educated on the effects of insurance fraud.
Offering safety incentives in exchange for strong performance
Keeping a motor vehicle accident kit and a disposable camera in company vehicles allows you to document evidence, providing a stronger subrogation result.
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Total Cost Risk Transfer
Once we’ve identified the risks and devised control measures, we can concentrate on the remaining risks to transfer and/or finance. You should consider questions like, “How much risk can I afford to assume in-house?” How can The Safeguard Group, Inc. help you transfer that risk contractually to a third party? Finally, how much of the exposure do I want to finance with an insurance policy?
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Addressing these questions provides guidance on how to approach risk financing. Consider your current cash flow requirements. Are the receivables current? How long is the lag, and are there resources to correct it?
Consider self-insured retentions if you have a mature loss control program and the financial reserves to cover any unexpected losses. As a result, a mix of insurance and non-insurance strategies should be considered.
Identifying the Total Cost of Risk (TCOR)
Though precise definitions vary by organization, the general definition of TCOR describes the metric that represents the success of a company’s risk management programs and processes. TCOR is calculated specifically using an equation that includes the total cost of the components required for taking on risk. These components are typically divided into three categories: indirect loss costs, direct loss costs, and risk management administration expenses.
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The Advantages of TCOR
Aside from the ability to benchmark externally, the Port of Houston Authority outlined several key benefits they observed from using total cost of risk in its presentation at Texas PRIMA. Measuring progress toward risk management goals, communicating accountability to senior management, and developing a more focused risk and insurance strategy are all examples of these.
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This metric’s feedback component encourages discussion and analysis of the most critical components of a risk management program. In a Risk and Insurance article, Carolyn Snow, director of risk management at Humana Inc., stated, “Total cost of risk is an invaluable communications tool.” The calculation has been compared to an engine warning light, signalling when “something is amiss, requiring further examination,” according to the same article. Others have compared it to a barometer of health for your risk management program. What is clear is that without a comprehensive approach to TCOR, risk management efforts lose focus, isolate management actions from objectives, miss critical trends, and make progress opaquer in general.
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