One of the most important steps in risk management involves calculating the Total Cost of Risk (TCoR). This process involves tweaking insurance programmes, while conducting a proper study for estimating the CToR of a company/organisation also requires gathering the following information:
- Net premiums paid
- Level of excesses (General and those applied to specific guarantees)
- Past record of claims (number of claims, payments, reserves, excesses applied, etc.)
In addition, consideration needs to be given to those resources a company uses to manage its risks. For example, if the level of the company’s contribution to the payment of a claim -the excess- is very high, it may have to employ someone to supervise and monitor the company’s claims. The acceptable level of the excess should be consistent with the company’s appetite for risk. Another example could be the investment made for mitigating risks, thereby improving their quality, which should lead to a reduction in the premiums to be paid, etc.
