Focus on: Total Cost of Risk
Like many other industries, manufacturing is facing a challenging times due to the downturn in revenues relating to the COVID-19 crisis and associated lockdowns. With restrictions on cashflow and liquidity, having a better understanding of risk is essential.
Traditionally, the focus has been on insurance premiums when quantifying risk – but this does not account for the true cost of a crisis fallout, and many of these missing costs are costs businesses can control.
What is total cost of risk?
The key is to understand your “total cost of risk” (TCOR). This is the sum of direct and indirect costs your company is responsible for, relating to a risk. This includes the following:
- Insurance premiums.
- Retained losses in the form of deductibles and uninsured losses.
- Claims, loss adjustment, and administrative costs.
- Cost associated with risk management.
- Transaction costs.
- Loss of reputation.
- Overtime and additional training.
- Costs associated with finance.
Indeed, the benefit of decreasing premiums can be negated if an company ends up seeing an increase in the indirect costs outlined above. In some instances, indirect costs can amount to more than the claim itself. When trying to achieve true cost reduction, the most impactful way is by lowering indirect costs.
TCOR can help you identify these costs so that you can work to minimise them; this will ultimately help you to control the liquidity of your company’s cash-flow.
A proactive approach
COVID-19 has highlighted the need to build business resilience in order to weather major crises. If effort to tackle these costs haven’t been made ahead of a crises, the very well could spiral when things go wrong and seriously damage the health of a business. We at Marsh encourage forward planning in terms of risk management in order to control costs. Understanding TCOR should be a key part of risk management planning.
Build resilience with TCOR
The pandemic has amplified the importance of reducing your TCOR. It has never been more important to protect liquidity and cash-flow. The restrictions and challenges brought about by COVID-19 will continue to test the best risk management strategies and well-laid plans. Looking at TCOR is a good way to ensure you are building resilience into your risk management in order to weather the storm.