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Applying a Total Cost of Risk Strategy to Common Commercial Insurance Misconceptions

Commercial insurance is a critical component of risk management for businesses of all sizes. However, misconceptions about how insurance works and what it covers can lead to inadequate protection and unexpected costs. One way to address these misconceptions is by understanding the concept of the Total Cost of Risk (TCOR). TCOR is a comprehensive measure that includes all costs associated with managing risk, not just the premiums paid for insurance policies. This article explores how TCOR applies to risk management strategies and clarifies common misunderstandings.

What is Total Cost of Risk?


The Total Cost of Risk encompasses several components:

  • Insurance Premiums: The regular payments made to insurance companies for coverage.

  • Retained Losses: The portion of losses that the business absorbs, often through deductibles or self-insurance.

  • Administrative Costs: Expenses related to managing risk and insurance programs, such as salaries for risk management staff and costs for safety programs.

  • Loss Control Costs: Investments in safety measures and risk prevention to reduce the frequency and severity of claims.

  • Indirect Costs: These can include the impact on business operations due to losses, such as downtime, reputational damage, and legal expenses.



Common Misconceptions in Commercial Insurance


1. Insurance Premiums Are the Only Cost:

Many business owners believe that the premium paid for insurance is the sole cost of risk. However, TCOR highlights that premiums are just one part of the equation. For example, a low-premium policy might come with high deductibles or limited coverage, leading to significant retained losses.


2. Insurance Covers All Types of Losses:

There is a misconception that commercial insurance policies cover all possible risks. In reality, policies often have exclusions and limitations. Businesses need to understand these exclusions and factor in potential uncovered losses into their TCOR.


3. Higher Deductibles Always Save Money:

Opting for higher deductibles can lower premium costs, but it also increases retained losses. Businesses need to evaluate their financial capacity to handle higher deductibles and balance this against potential premium savings.


4. Claims Management Isn’t a Priority:

Effective claims management is crucial for minimizing TCOR. Poorly handled claims can result in higher retained losses and increased indirect costs. Investing in a proactive claims management process can help reduce the overall cost of risk.


5. Safety Investments Are Too Expensive:

Some businesses view investments in safety and loss prevention as unnecessary expenses. However, these investments can significantly reduce the frequency and severity of claims, ultimately lowering TCOR. For instance, implementing a comprehensive safety program can reduce workplace injuries, leading to lower workers’ compensation costs.



Applying TCOR to Improve Your Risk Management Strategy


By adopting a TCOR approach, businesses can make more informed decisions about their risk management strategies. Here’s are the top five ways:


1. Comprehensive Risk Assessment:

Conducting a thorough risk assessment helps identify all potential risks and their associated costs. This includes evaluating the likelihood and impact of different types of losses and understanding the limitations of current insurance coverage.  This also may include an exposure review to identify gaps in coverage.


2. Holistic Cost Analysis:

Analyzing all components of TCOR allows businesses to see the true cost of risk. This includes comparing different insurance options, understanding the trade-offs between premiums and deductibles, and factoring in administrative and indirect costs.


3. Strategic Risk Mitigation:

Investing in loss prevention and safety measures can reduce the frequency and severity of claims. Businesses should consider these investments as part of their overall risk management strategy, not just as standalone expenses.


4. Effective Claims Management:

Developing a robust claims management process can help control costs. This includes timely reporting of claims, thorough investigation, and efficient resolution. Businesses should also work closely with their insurance providers to ensure claims are handled effectively.


5. Regular Review and Adjustment:

The business environment and risk landscape are constantly evolving. Regularly reviewing and adjusting the risk management strategy ensures that the TCOR remains optimized. This includes staying updated on changes in insurance coverage, industry regulations, and emerging risks.


Understanding and applying the Total Cost of Risk concept can help businesses overcome common misconceptions about commercial insurance. By looking beyond premiums and considering all aspects of risk management, businesses can make more informed decisions, ultimately leading to better protection and cost savings. Adopting a holistic approach to TCOR enables businesses to effectively manage their risks, ensuring long-term stability and success.

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