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BEYOND TCOR: HARNESSING DATAAND ANALYTICSBy Claude Yoder, Global
Head of Analytics, Marsh
One of the measurements companies have long used in
their risk management departments is TCORthe 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 dont seem to place the same strategic
value on TCOR as risk managers do.
According to Marshs 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 TCORs
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 measuretheir organizations
overall growth strategy.
In that regard, traditional TCOR metrics may
fall short.
One way to ensure a more robust
understanding and acceptance of TCOR
within the C-suite is to look at it more
strategicallythat 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 analyticsthat go well beyond
static, insurance-only
TCOR.
More than half (56 percent) of the
companies in this years Excellencesurvey
said their use of data and analytics has
changed in recent years. Senior leaders
expect risk managers to dig into the data
RiskSpotlight
CLAUDE YODER
Global Head of Analytics
+1 212 345 8297
[email protected]
and provide explanations and
insights to help drive organizational
success.
This means that risk managers have
a tremendous opportunity to
become even more engaged in the
organizations 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 filterthrough all the available data
and
find risk information to help guide
their organizations strategic
planning.
But first, they have to understand
their companys goals; its industry
benchmarks and trends; and what
its senior management is interested
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Marsh is one of the Marsh & McLennan Companies, together
with Guy Carpenter, Mercer, and Oliver Wyman. This document is not
intended to be
taken as advice regarding any individual situation and should
not be relied upon as such. The information contained herein is
based on sources we
believe reliable, but we make no representation or warranty as
to its accuracy. Marsh shall have no obligation to update this
publication and shall
have no liability to you or any other party arising out of this
publication or any matter contained herein. Any statements
concerning actuarial, tax,
accounting, or legal matters are based solely on our experience
as insurance brokers and risk consultants and are not to be relied
upon as actuarial,
accounting, tax, or legal advice, for which you should consult
your own professional advisors. Any modeling, analytics, or
projections are subject to
inherent uncertainty, and the Marsh Analysis could be materially
affected if any underlying assumptions, conditions, information, or
factors are
inaccurate or incomplete or should change. Marsh makes no
representation or warranty concerning the application of policy
wordings or the
financial condition or solvency of insurers or re-insurers.
Marsh makes no assurances regarding the availability, cost, or
terms of insurance coverage.
Copyright 2012 Marsh Inc. All rights reserved.
Compliance No. : MA12-11546 3513
in pursuing. Its 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 examplerisk managers can direct their use and
interpretation of data and analytics strategically.
More than a third of Excellence survey respondents said
their
firms broad-based risk committees could be more effective if
they used better analyticssuch as loss simulation, loss
forecasting, and risk tolerance. Simply providing more data,
however, is not the answer. Its 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 dont supply it to them, they will turn elsewhere,
according to the 2012 AFP Risk Survey.
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 beyondis 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 Marshs upcoming
New Reality of Risk webcast, Beyond TCOR: Harnessing
Risk Data and Analytics,on Wednesday, May 23, at
11:00 a.m. (ET).
MEASURING TCORDespite its longstanding use in risk
management
benchmarking, not all companies measure TCOR the same
way. The graphic below shows how respondents to a recent
survey answered the question: What does your company
include when measuring TCOR?
Leaders typically are looking for data and analytics that
are
informative and actionable as they develop and measure the
organizations growth strategy. TCOR, our results indicate,
fallsshort. Even in firms at which our C-Suite respondents
understand that TCOR is being measured, they show little
awareness of what goes into the calculationanother
indication of the relatively low value they place on it. One
main
reason is likely to be that the TCOR number is not material
in
terms of a companys overall finances; therefore, it is of
little
note in strategic discussions.- from Excellence in Risk
Management IX: Be Visible, Be Valuable Be Strategic.
To read the full report, go to www.marsh.com.
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