Improving Your Risk Intelligence: Step 3 - Monitoring Success
Issue #18
August 6, 2007
Now that we have assessed our risks (Step 1) and implemented programs to address those risks (Step 2), how do we measure the success of our risk management program – by statistical results or by performance activities? In reality, success should be measured throughout the year based on a combination of each.
Statistical Results
This typically includes reviewing insurance loss histories and noting the number of claims and the total amount of dollars incurred. If losses are low for a certain period of time, then the conclusion is that the program is working well. This may not be the case, as using just loss statistics may contain a certain amount of luck.
There is, however, value in analyzing insurance loss data. By drilling down to identify the root causes of workers’ compensation, auto, property, and general liability claims, problems can be quantified and point the way to implementing effective solutions.
Performance Activities
Here is the advantage of having a strategic risk management plan. With goals and objectives already set forth, and responsibilities defined, you can manage risk like any other critical business operation. Accountability is now based upon specific, measurable, attainable, time-sensitive goals.
Periodic reporting should take place in order to maintain accountability for achieving the goals in the time frames outlined.
Total Cost of Risk
Another alternative is to measure your cost of risk. The total cost of risk (TCOR) concept provides you with the most accurate figure available to measure the cost and effectiveness of your risk management program. Additionally, when a common denominator is used to express TCOR, such as annual revenues, you can identify trends from year to year, as well as compare your performance to that of others in the same industry.
Measuring the cost of risk dates back to the early 1960’s when Douglas Barlow, the risk manager for Massey Ferguson and past president of the Risk and Insurance Management Society (RIMS) sought a measure to capture the costs of managing and financing the risks of his employer. In 1993 the cost of risk concept was formalized by the Institute of Management Accountants and RIMS with the publication of a standard of management accounting statement entitled “Practices and Techniques: Internal Accounting and Classification of Risk Management Costs.” According to this standard TCOR for an organization is the sum of:
- Risk financing costs, including premiums for property, workers’ compensation, and liability insurance.
- Loss costs, including retained or indirect costs with respect to property, workers’ compensation, and liability exposures.
- Internal administrative costs related to the risk management and insurance department.
- Fees paid to outside service providers.
Since that time, TCOR has been used by major actuarial consulting firms, is published annually by RIMS for benchmarking various industries. Once understood, you can graphically compare our results from one year to the next over time to detect any trends.