In Depth: Workers' Compensation

Calculating Total Cost of Risk in Comp is an Imprecise Science

Determining it may be inexact; pursuing it merits attention.
By: | October 3, 2017 • 7 min read

Determining what to include in a total cost of risk analysis for a workers’ compensation program is an imprecise exercise.

Yet uncovering and measuring the total cost of risk, or TCOR, is a fundamental practice for gauging the strengths and weaknesses of a workers’ comp program’s individual components. It can help determine the efficient allocation of resources so each component is optimally managed to extract the best results from the entire program.


“It’s a precisely measured, nebulous term,” explained Pamela F. Ferrandino, a vice president at Gallagher Bassett.

“While TCOR can be nebulous, it’s important to define it and continue to measure it and see where you can make rational improvements.”

TCOR is an invaluable communications tool, added Carolyn Snow, director of risk management at Humana Inc.

Humana insures its workers’ comp risks through a captive and allocates insurance costs to individual business units. TCOR helps communicate to the upper management of those business units why their losses may be driving any additional expense, said Snow, who was the Risk and Insurance Management Society Inc. president in 2014.

“You are not going to go to a business unit CFO and say ‘You know, your costs are going up.’ They are going to ask why and you are not going to say, ‘They just are,’ ” Snow elaborated.

“You might do that one time, but you will never do it again without having a good business case of why,” she said.

TCOR is often thought of in its simplest form, typically including insurance costs plus claims liability expenses and administration costs. It is commonly mentioned as one entire amount comprised of the sum of those components.

Carolyn Snow, director of risk management, Humana

But for a more sophisticated dive into how workers’ comp program spending is paying off, or not paying off, a wider array of components can be included in how TCOR is defined. More precise use also calls for viewing TCOR as a rate that is compared to payroll or some other useful marker — say, for example, $13 per $1,000 of payroll.

Additional components in a TCOR analysis can include brokerage fees, collateral costs, legal services, reserves, risk management staff salaries and benefits along all claims management services such as nurse case management and more.

TCOR can even include the cost of office space for an employer’s workers’ comp department, said Joe Picone, casualty claims practice leader at Willis Towers Watson.

Employers frequently use TCOR to gauge how well their claims administrators are managing various workers’ comp services they contract for, said Paul Braun, managing director for Aon Global Risk Consulting.

In addition to gauging whether a workers’ comp program is functioning optimally or going off kilter, brokers selling TCOR analysis services argue that employers can apply it to help evaluate appropriate risk retention levels and assist in negotiations for better insurance pricing.

It can play a role in determining the best allocation of capital and assist in making risk management personnel decisions, they said.

The rise in use of claims analytics, like predictive modeling, make it increasingly useful to conduct TCOR evaluations to measure whether actionable program changes made at the suggestion of those analytic findings improved outcomes, Braun said.


Otherwise, workers’ comp managers could expend too much effort executing program changes that theoretically should reduce claims costs, but are not producing the desired impact.

“If it isn’t saving you any money, it might require a lot of activity and it might sound good, but it’s not impacting the overall cost of risk,” Braun said.

Applications for TCOR are evolving along with the spread of claims analytics, Ferrandino added.

Gallagher Bassett, for example, developed a system that measures an individual claim’s attributes to gauge its complexity. That information, used in conjunction with TCOR to benchmark a workers’ comp program against peer companies, provides additional insight for determining risk retention levels, she said.

“If you have a higher complexity than your peers, you might want to take a lower retention to mitigate the volatility,” Ferrandino explained.

An aging workforce exacerbating the severity of today’s claims also make understanding an employer’s TCOR increasingly critical, Braun said.

“If you squeeze premiums then losses may go up. If you squeeze losses then broker fees may go up. If you squeeze broker fees then insurance premiums may go up.” — Mark Noonan, managing principal, casualty at Integro

Aging workers may require employers to modify their return-to-work program parameters, for example.  That calls for evaluating whether such modifications are paying off.

“It is looking at services that traditionally make sense, but need to be modified,” he said.

Periodically reviewing the TCOR rate is comparable to checking whether an automobile dashboard’s engine warning light is activated, Picone explained. A changing TCOR rate will not describe what is wrong with a workers’ comp program, just as the car’s engine warning light won’t reveal what is wrong with the vehicle.

But like an engine warning light, changes in a TCOR rate trend alerts that something is amiss, requiring  further examination.

TCOR rate changes can prompt the risk manager to ask “is it a positive trend or a negative trend?” Picone said. “And if it is negative, why? Then you peel it back and ask ‘Is it claims mapping costs, is it loss costs, collateral costs, vendor costs, etc?’ ”


Picone cited the example of a client whose spend on nurse case management services increased by hundreds of thousands of dollars over a few years.

“Their loss adjustment expenses for claims went through the roof” while their TCOR rate deteriorated, rather than improved.

The increase in expenses and deteriorating TCOR rates pointed to a potential for savings by reducing nurse case management services.

TCOR provides a useful, “whole-picture” look at how changes to one part of a program might impact other parts of the program, agreed Mark Noonan, managing principal, casualty, at broker Integro.

“Being able to look at the total picture provides the opportunity to see where things are working and where they are not and how you act in one area impacts other areas,” Noonan said.

TCOR analysis also benefits companies by providing a more consistent and efficient organizational approach to risk management that can ultimately help company profitability.

“There is certainly a benefit,” he said.


But too much emphasis on shrinking TCOR has risks.

Reducing insurance premiums by changing underwriters, or slashing claims management fees by contracting with a lower-cost claims administrator could quickly reduce TCOR.

But a cheaper insurer or third party administrator may pay less attention to loss-reduction practices, driving up loss costs.

“I have always viewed total cost of risk as similar to the analogy of a Jell-O mold,” Noonan said.

“If you squeeze premiums then losses may go up. If you squeeze losses then broker fees may go up. If you squeeze broker fees then insurance premiums may go up.”

Managing by TCOR requires prudent decision making, Picone agreed.

“You can’t keep squeezing (TCOR) down to the point where you are jeopardizing coverage or jeopardizing outcomes, or service to your employees,” he said.

Depending on corporate culture and financial strength, some employers may provide certain workers’ comp services despite their TCOR impact.

An employer with a reputation for caring for its workers, for example, might provide injured employees with additional nurse case management care beyond an amount shown to be financially optimal.

Despite the advantages of understanding TCOR, employers do not always call it by its formal name nor do they always conduct a workers’ comp program TCOR analysis, Noonan said.

Even in those cases, however, risk managers evaluate the return on investment from their workers’ comp program spend.

But they could still benefit further from TCOR analysis, allowing a more complete view of their program’s efficiency, Noonan said.

But there is one argument for understanding a program’s TCOR that will make sense to risk managers.

Current workers’ comp insurance market conditions leave little room for employers to glean substantial savings there, Ferrandino said.

“But where the opportunity is for clients (to save workers’ comp dollars) is really in managing the risks they have,” she said. “It’s claims management and bringing greater resolution.” &

Roberto Ceniceros is senior editor at Risk & Insurance® and chair of the National Workers' Compensation and Disability Conference® & Expo. He can be reached at [email protected] Read more of his columns and features.

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession: Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?


I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?


Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?


A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]