What's your Total Cost of Risk (TCOR)?

If you don't know, you need a better connection to your company's risk managers, who measure risk by what can be insured and what it costs to do so. While the measurement of operational risks is still a bit of a puzzle for CSOs, risk managers have used TCOR for ages.

[Also read 7 common risk management blunders]

In the digital and compliance age, CSOs are being better integrated into the risk management and measurement process, says David Bradford, the man who leads the survey that establishes a key measure of risk insurance: the RIMS Benchmark Survey, from the Risk and Insurance Management Society. Bradford is president of the research and editorial division of Advisen, which conducts the annual survey on behalf of RIMS. Risk managers use the benchmark to see if they're paying too much for their insurance.

But as the discipline of risk management is evolving, so too is the calculation of TCOR. The measure is now expanding to include less tangible costs, like lost productivity. Bradford spoke with CSO about the changing landscape.

CSO: How do you assess the total cost of a company's risk?

Bradford: The concept is maybe a little deceptive when you say "total cost of risk." It's the total cost of things risk managers are responsible for.

The idea has been around since the 1940s or '50s. The way we traditionally define it for purposes of the RIMS Benchmark survey, it's:

the cost of insurance

plus the cost of the losses that are retained instead of or as part of your organization--for example, risks the policy doesn't cover, or a company's deductible

and the administrative costs of the risk management department

That definition continues to be useful. But now you have to think about strategic risk, operational risk, your information security risk--it gets to be a fairly massive cost. And you have to figure out how to benchmark yourself against other organizations.

What was the big takeaway from this year's benchmark?

The total cost of risk relative to insurance operations, after going down for a few years in a row, edged back up this past year.

The cost of insurance is driven in large measure by how much capital there is inside the insurance industry. Capital is equivalent to supply. If you have a lot of capital, you have a lot of supply, and the insurance industry been awash in supply since about 2004.

This past year, the supply of capital is still high, but the financial performance of the industry was so dismal that they started to put the brakes on rate decreases, so the cost of risk rose marginally.

From RIMS' perspective, who is a risk manager?

There's typically somebody with that title in larger organizations, and their role is to look at the types of risks that can be insured. They make the decision on whether something can be insured and go out and purchase [that policy].

In a healthcare organization they have clinical responsibilities; in a bank they have financial responsibilities.

Not necessarily a CSO?

Not traditionally, but everything's changing now. A lot of organizations are looking at information security from the standpoint of an enterprisewide problem or solution. The risk manager becomes part of an interdepartmental team headed by a CISO.

How is the RIMS benchmark changing?

We're looking at the more expansive view of risk, how people are thinking about risk and what constitutes the real costs of risk in a changing world. We're looking at things like brand and reputation issues in addition to your hard costs. Risk managers are being questioned about the soft costs, the intangibles.

[Check out CSO's new risk management blog!]

We are just now developing awareness that the traditional view of cost of risk is not necessarily going to be as useful in the future.

What's driving these changes?

We've been creating this book [the benchmark] for years and assuming the industry was satisfied with the definition of the total cost of risk, but had never tested that premise. A couple of years ago we did a supplemental survey of risk managers and asked them what sort of additional factors are being incorporated into their thinking.

We gave them a list of different categories of risk. IT risk only made it into the equation for 10 percent of the respondents.

How many companies buy insurance for cybersecurity?

There's a thriving market for insuring against cyberfraud and hacking. We just completed a survey and I believe that close to 40 percent of larger organizations now buy [this type of insurance].

Does the TCOR metric matter to CSOs and CISOs?

I think so. Obviously for CSOs, risk is the thing they're battling against. If you get into brand and reputation issues in addition to your hard costs, there's got to be some way to say, "Here's what we're spending on managing risk, and here's the benefit we're getting from it."

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