Total cost of risk (TCOR) explained in plain English

What is total cost of risk?

The University Risk Management & Insurance Association white paper cited by CFO.com gives the formula as premiums + retained losses + administrative expenses = total cost of risk

The head of research at Advisen, which runs the RIMS Benchmark Survey, warns the name is slightly deceptive: it is the total cost of the things risk managers are responsible for

Another source says its first formal corporate use was in 1962, and that a 1993 standard narrowed the definition to exclude risk control costs

A warning on age: two of these sources date from 2012, one from 2019 and one shows no date. Survey figures and market conditions in them are out of date, so this article uses them for concepts only.

What goes into it?

Premiums are what companies pay insurers to take on risks such as property, liability and workers' compensation. They also include money set aside for risks the company chose not to transfer

Retained losses are those a company pays itself, either through a captive (a self-owned insurance company) or other self-insurance

Administrative expenses include claims-management costs and the cost of collateral set against self-insured losses

A consultancy view adds that even with a captive, a risk transfer premium still passes from the parent to the captive, and most larger companies still keep some risk on their own balance sheet, such as a cyber deductible

How do you measure it?

Start by agreeing what is in and what is out. The Spring Consulting Group authors say year-over-year consistency in what TCOR includes and excludes is perhaps the most important point

Watch for double-counting. If loss control is already inside a captive premium, counting it again overstates the figure

For retained losses, a Marsh analytics head quoted by CFO.com says best practice is an actuarial estimate of ultimate losses for the period

Cash accounting for retained losses, common among smaller companies, can give a misleading view of that cost

The Spring authors also advise against relying solely on loss runs, because the claims administrator typically books only case reserves and not the actuarial development for claims incurred but not yet reported

Why does it matter before a captive decision?

The Spring authors say a TCOR analysis can be embedded within a feasibility study, where alternative retentions in the market are evaluated and scenarios compared to see whether a captive makes sense

They also say that if the goal is simply to stay at the same cost, a captive may not be the best choice and the commercial market may serve better

Finance leaders have extra points to weigh. A Georgia Tech accounting professor quoted by CFO.com says self-insuring can make earnings more volatile and may raise the cost of capital, a hidden cost that may not be obvious

He also says collateral held against self-insured losses tends to sit in low-yielding, liquid assets, another possible hidden cost

What are the limits of TCOR?

A single year can mislead. The Delphi Risk Management author argues that if a risk manager cancelled all corporate insurance, TCOR would suddenly look remarkably low, and it could be a long time, if ever, before the true impact showed

He lists costs that TCOR leaves out: opportunity costs of coverage not bought, full broker compensation, management time, self-insured loss volatility and loss control costs

A cut in retention or limits does not automatically lower TCOR. The Spring authors give an illustration where a budgeted 5 percent fall becomes a realised 10 percent rise after a $3 million loss that dropped coverage would have paid

Benchmarks need care. Captive versus no captive, geographic risk class differences, treatment of risk management admin costs, inflation and payroll can prevent direct comparison between organisations

The measure is also narrow. Advisen's head of research said in 2012 that the traditional view may be less useful in future, as people look at soft costs such as brand and reputation

The Delphi author proposes alternative metrics but says traditional TCOR is likely to remain the foundational industry metric, at least in the near term Those proposals are one practitioner's views, not an accepted standard.

What should you do next?

Write down your own TCOR using a consistent definition, and test the retained-loss figures against an actuarial estimate. Then ask whoever advises you on a captive to show how a feasibility study would use it. Tax, regulatory and domicile questions are separate, so take specific professional advice on those.

Sources

• CFO.com, How to Gauge the Cost of Corporate Risk (5 July 2012; read 2 November 2026)
• Captive International, The next generation of risk cost measurement (12 September 2019; read 2 November 2026)
• Captive International, A total guide to total cost of risk (no date shown; read 2 November 2026)
• CSO Online, What's your Total Cost of Risk (TCOR)? (12 November 2012; read 2 November 2026)