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.

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Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”


“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.


“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?


“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.