Total Cost of Risk – How do you use it?

But David, how do I get my clients to understand total cost of risk? I don’t understand what all does it mean, and why is it important to them? What can they even do with this information? If you don’t know how your clients can use total cost of risk to approve their operations, we need to have a conversation.

It Helps Make Informed Risk Management Decisions

Total cost of risk is critical to organizations for several reasons. The very first one is because it helps them make educated and informed risk management decisions. Whether they want to buy some piece of equipment, if they wish to invest in a safety committee, whether they wish to have additional training brought in from the outside, there are all kinds of things that come into play. But if you don’t know the total cost of risk and the ultimate impact A) in terms of upfront expense and B) projected return on that investment through operational efficiencies and loss profile improvement, how can you make the best decision?

The absolute best organizations understand their total cost of risk, and they consider it every time they make a decision involving the risk management function of their organization. You have to communicate this to your prospects and clients at the point of sale because it’s paramount to their future success. Calculate the total cost of risk and provide it to them.  Then, engage yourself in those discussions with them about how they will use that information to make decisions.  Decisions about initiatives that quite frankly they should have made a long time ago, but couldn’t because they didn’t understand.

It Helps Benchmark Your Progress

Number two, it helps you identify where you’re at in the grand scheme of things, concerning your goals and your objectives. Once you’ve identified the total cost of risk, you need to create plans for your clients and prospects to move forward passed where they are right now. If you’re not doing that, what are you doing to drive change in their organization? Are you going to work extra hard to negotiate down insurance premiums? Which, as agents, we all understand, can only go so low. Until you can transform the way you think and understand, there are so many other financial things that can happen in an organization resulting from an inefficient risk management function. You’re never going to deliver the most value to your clients. You may be a great insurance technician, and you might be a great insurance salesperson, but when you move into the middle market, you’ve got to up your game.

It can’t just be about the premium and the coverage. Those things are certainly important, and there are several components of total cost of risk. But at the end of the day, you have to broaden your horizons. Using total cost of risk to measure where you’re at versus where you’re going to be is huge. And it’s an excellent way for you to interact with your clients in real-time to make sure they’re on the right track.

It Helps Promote Safety and Risk Management Initiatives

Number three is you can promote safety and risk management processes and actions. You got to share this stuff with the team. One of the things that I do when I engage with a company is I do a site visit to as many of their sites as they’ll let me go to, and I want to interview people. I want to interview the executive leadership. I want to interview the frontline leadership, and then I’ll want to interview the frontline employees. And I always have three questions that I ask.

How do you measure Quality?

The first one is, how do you measure quality? Any organization can tell you how they measure quality in their organization. Right down to the letter, there’s a process for that. It might be the number of rejects in a batch if you’re a manufacturing unit. It might be the number of rooms that are unrentable due to short staffing if it’s a resort. Any number of things that will drag financially on the organization also can tie into quality. Leadership at the highest level can always tell you how they measure quality, which trickles down to the frontline workers.

How do you Measure Productivity?

The second thing I ask is, how do you measure productivity? From my days in the grocery business, I understand sales per staff-hour directly correlate to the payroll percent on my income statement every month. Every single person in operations out there can tell you how they measure productivity. It could be units per hour. It could be any number of things, but I can assure you they know how to measure it. And they’re proud to tell you that they know how to measure it, and they can whip it out in a split second.

How do you Measure Safety?

But then I get them. I get the prospect when I ask, how do you measure safety in your organization? And because I’m typically visiting the sick, there aren’t processes and procedures in place, but it blows my mind to know they’re sophisticated enough to tell you about quality and how they measure it. They’re sophisticated enough to tell you about productivity and how they measure it. But when it comes down to safety, it’s crickets people. Those three questions change the way that you interact with your clients and prospects. It would help if you asked those every single time without fail.

You Must Speak Their Language!

There should never be an appointment you go on that you don’t understand the metrics that your clients and prospects are using internally because you need to translate your message into that language they know. And if they don’t understand the accountability associated with measuring safety, just like quality and productivity, that’s going to be your job to change the culture of their organization and shift a mindset into one of safety and awareness. That’s not being an insurance salesperson. That’s being a risk manager. And ultimately, if you’re going to manage total cost of risk, you’re a risk manager, not somebody that shuffles a bunch of papers in a commoditized transaction and sells insurance.

It Creates a Basis for Incentive Programs!

The fourth thing that you can do when you measure total cost of risk is to create a basis for management and employee incentives. I understand this is a slippery slope, but there are ways that this is done effectively in any organization. You’ve got to incent people to get the desired result. It’s not always going to be something that you can just let roll off your back. You have to be involved. You have to drive change. I have accounts that have been in my book of business north of 10 years, and I’m still driving change ten years later in baby steps because it was that far off when we engaged with them.

This is a never-ending battle, and it’s something you have to be committed to, and you have to believe. You have to be able to articulate when you get to the point of sale, or somebody else who does understand and who does buy-in and who does know how to communicate will come in and take away a piece of business from you. You could be doing everything right on the insurance side. I’ve seen it a thousand times. Technically the insurance program is sound. The customer service is off the charts, but there’s a gaping hole because all you do is worry about the insurance transaction. It’s time that you come to the other side. If there are five parts to the total cost or risk calculation and insurance premiums is only one of those parts, that’s only 20%.

Insurance is not the Only Component!

20% of the components are insurance. Focus on the other 80. And that 20 will automatically be the best result possible for staying where they are. And they have done everything they can to drive that number down as low as possible. See, when we’re in insurance, we focus on loss ratio. Why do we do that? Because you can measure it. But why is that where we stop? Why do we stop at measuring when it comes to insurance premiums, and that’s it? We can do a significant premium versus lost summery. We can look at loss ratios and understand that our profit sharing and contingencies are based on, but are we doing a service for our client? What are we doing to make their organization better? And the answer is not enough.

Indirect Costs of Claims

If you want to drive premiums down, drive total cost of risk down. Look at the indirect cost of claims. Look at all the claims that have come in that weren’t covered or were inside of a deductible layer that gets added to that premium. Look at the cost of the risk management function. And I’m not going to go into all of the components of total cost of risk in this post, because I’ve got a whole other post ready to go. But I’m telling you, people, if you want to impact price, if you’re going to drive change in an organization, you and you alone are the one that can change the way the game gets played.

Go in and apologize to that prospect. Go in and apologize to that client for what our industry has taught them to do over all the years. It’s not their fault that they only get engaged 60 to 90 days before renewal. That’s what we’ve taught them to do. Today’s the day you change the way you think. Today’s the day you buy into total cost of risk. Today’s the day that you go in your clients and your prospects, and you give them measurable goals, and then you hold them accountable to them, and you report back to them in real-time. If you could do all those things, I don’t even need to tell you what’s going to happen. You’re going to kill it in commercial insurance.


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