Risk Spotlight: Beyond TCOR—Harnessing Data and Analytics
Published on: 27-Apr- 2012 | Comments: 0
One of the measurements companies have long used in their risk management departments is TCOR—the total cost of risk. TCOR calculates the insurance-based aspects of risk, including the costs associated with premiums, retained losses, collateral, claims, and administration, and is relied upon by risk managers as an effective benchmarking measurement and decision-making tool.
But an interesting trend is developing inside the C-suite at many organizations: Senior executives don’t seem to place the same strategic value on TCOR as risk managers do.
According to Marsh’s 2012 Excellence in Risk Management survey, 68 percent of risk managers said that they use TCOR measurements, but many C-suite respondents did not seem to be aware of this: only 49 percent said that their companies measure TCOR. Even in firms where C-suite respondents understand that TCOR is being measured, they show little awareness of what goes into the calculation.
So is the gap in perception about TCOR’s value important? We believe it is. Senior leaders typically are looking for data and analytics on risk that are informative and actionable as they develop and measure their organizations’ overall growth strategy. In that regard, traditional TCOR metrics may fall short.
Express TCOR in Terms of Volatility
One way to ensure a more robust understanding and acceptance of TCOR within the C-suite is to look at it more strategically—that is express TCOR in terms of the volatility around the cost components, rather than just the expected dollar amounts. Considering volatility and expanding the scope of what is included in the TCOR calculation may provide greater insight for strategic decision making, especially if the calculations include how each component affects the overall risk portfolio. This insight may lead to consideration of various scenarios that highlight potential vulnerabilities and opportunities related to previously unforeseen events or trends.
Taking a more strategic approach to TCOR should be done as part of an overall approach to the use of data and analytics that go well beyond “static,” insurance-only TCOR.
More than half (56 percent) of the companies in this year’s Excellence survey said their use of data and analytics has changed in recent years. Senior leaders expect risk managers to dig into the data and provide explanations and insights to help drive organizational success.
Opportunity for Risk Managers
This means that risk managers have a tremendous opportunity to become even more engaged in the organization’s strategic direction and execution by demonstrating how strategic risk management methodologies help drive a disciplined approach to risk-based decisions. The exponential growth in business data and computing power in the past decade challenges risk managers to filter through all the available data and find risk information to help guide their organization’s strategic planning.
But first, they have to understand their company’s goals; its industry benchmarks and trends; and what its senior management is interested in pursuing. It’s difficult to know what analytics to run, who to involve in the interpretation, and how the results may impact decisions without knowing what is being chased. Once the goal is understood— to manage volatility and protect earnings per share, for example—risk managers can direct their use and interpretation of data and analytics strategically.
More than a third of Excellence survey respondents said their firm’s broad-based risk committees could be more effective if they used better analytics—such as loss simulation, loss forecasting, and risk tolerance. Simply providing more data, however, is not the answer. It’s all about turning data into information via sophisticated analytics to assist with better decision-making. Likewise, a recent survey of financial executives about risk issues found many of them to express an urgent need for risk-related data and analytics. If risk managers don’t supply it to them, they will turn elsewhere, according to the 2012 AFP Risk Survey.
C-Suite Expect More Than They DId Just Three Years Ago
The C-suite expects risk managers to provide better quantification and analysis on risk management than was the case just three years ago, Excellence respondents agreed. Analyses should be related to the strategic goals of the organization in order to be effective. In fact, as expectations have increased, C-suite members say that they are looking for greater involvement from risk management in business strategy planning. The effective use of data and analytics—from TCOR and beyond—is one of the keys to making that happen and to helping companies realize their strategic goals.
To learn more about how to use risk data and analytics to inform and improve strategic decisions join Marsh’s upcoming New Reality of Risk webcast, “ Beyond TCOR: Harnessing Risk Data and Analytics,” on Wednesday, May 23, at 11:00 a.m. (ET).
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