Finding the total cost of risk

Danish risk managers are working to develop a standardised definition of the total cost of risk (TCoR) that can be used within an enterprise risk management reporting framework.

Not only will this make it easier to quantify companies’ risk exposure, it will also make it easier to decide what risks to retain and what to transfer to the insurance market, said Sussi Sommer Bisgaard, senior risk manager at Denmark-based medical devices manufacturer Coloplast and a Darim board member.

Sommer Bisgaard is part of a Darim working group that set about establishing a common understanding of the total cost of risk, standardising the data to be used and exploring how this can be used within an ERM reporting framework.

Alongside Sommer Bisgaard are Helle Friberg, senior insurance manager at Danish telecommunications company company Nuuday, Eva Guldhammer, lead insurance manager at Denmark’s largest digital infrastructure provider TDC Net, and Niels Fogh Kristiansen, account director and partner at WTW Denmark.

The first task for the working group was to divide the project into two parts – the first to look at developing a shared understanding of the basics of TCoR and how it can be put to use by risk and insurance managers, the second to see how TCoR can be used within an enterprise risk management reporting framework.

“What is the cost of TCoR?” said Sommer Bisgaard. “It may be that some of us have been measuring it without knowing it.”

While many risk managers in the group concluded that they were calculating their TCoR already, there are typically differences in how this is done.

Initially, the definition was discussed with the risk managers in the group and then taken to the insurance industry for its perspective at the Darim conference in March.

The calculation of TCoR is a topical issue given the current market conditions where insurance capacity is reduced and premiums are rising. “It is attractive for senior management because they want to know why the insurance portfolio looks like it does,” said Fogh Kristiansen.

“We have seen a hardening in the last two years and senior management are asking us why costs are going up,” said Sommer Bisgaard. “More is expected of us. They [senior management] want the quantification and they want the numbers, so it is important to talk about it.”

It is also a critical tool in risk mitigation both in terms of providing more information to insurers and providing the cost benefit analysis to decide what exposures can be taken on by the company.

“It will be a tool to get better coverage and to better decide where to allocate it,” said Guldhammer.

In the meantime, the group will continue to recruit members from the risk and insurance industry and work on further standardisation, said  Sommer Bisgaard.