RiskSpotlight

BEYOND TCOR: HARNESSING DATA AND ANALYTICS

By 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 measure their 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 analytics that go well beyond static, insurance-only TCOR. More than half (56 percent) of the companies in this years Excellence survey said their use of data and analytics has changed in recent years. Senior leaders expect risk managers to dig into the data

CLAUDE YODER Global Head of Analytics +1 212 345 8297 Claude.Yoder@marsh.com 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 filter through 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

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 TCOR
Despite 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, falls short. 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.

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