Indirect Loss Costs - The Meat of the TCOR Sandwich

Understanding and explaining Indirect Loss Costs to clients and prospects is an acquired skill of Consultative Brokers™. They are at the heart of Total Cost of Risk and Total Cost of Human Capital (TCHC)™. In many cases, it is up to you as a Consultative Broker to make them understood by your clients or prospects.

Understanding and explaining Indirect Loss Costs to clients and prospects is an acquired skill of Consultative Brokers™.  They are at the heart of Total Cost of Risk and Total Cost of Human Capital (TCHC)™.  In many cases, it is up to you as a Consultative Broker to make them understood by your clients or prospects.

There are 3 important reasons why Indirect Loss Costs are so critical in the TCOR and TCHC methodologies:

These are the “hidden costs” that really eat up a businessperson’s profits and productivity.  Ask any true Risk Manager and they will tell you of this importance.

  1. The application of your resources is the only way to reduce these costs through risk control, claims management, and administration.  These become your points of quantifiable differentiation.
  2. In a first dollar or fully insured program, these costs remain even when the loss itself gets passed to the carrier.  It answers the client question:  “Why should I care about loss reduction?”  The answer is that while the insurance carrier pays the claims, the client absorbs the cost of indirect loss.

As I speak with brokers across North America on the subject of TCOR and TCHC™ there is one question that I am constantly asked:  “Where do you get those indirect loss cost factors?” or “What book can I find them in?”.

Now we are getting to the meat of the sandwich.  The only way to ascertain a client’s indirect loss cost factors is to have a business discussion with them regarding the costs associated with a loss.  These revolve around Business Risk Costs (profits, productivity, profitability and human capital).

There are guidelines you can use as points of discussion such as the OSHA Statistics and The Wausau Study.  However, both guidelines are in need of tremendous updating and should not be quoted as the Gospel.  That leaves you in a quandary as you attempt to quantify your impact and true nature of client costs.

Here is the truth about Indirect Loss Costs: they are what the client believes them to be.  Very few middle market accounts have a true understanding of their Indirect Loss Costs and it is up to you as a Consultative Broker to educate them.  Thereby, helping them to completely understand their Total Cost of Risk and Total Cost of Human Capital.

Why is this so important?  Because it provides you a quantitative benchmark from which to deploy resources.  If you have been the broker and the client’s indirect loss costs have declined, then it becomes a part of your quantifiable value proposition.  If you are competing for the account and you can determine ways to reduce losses, then the indirect cost savings becomes part of your Broker of Record Letter discussion.  Both approaches use TCOR and TCHC™ as your vehicle of credibility.

So, here are some thoughts on how to explain Indirect Loss Costs to a client and help ascertain the appropriate factors:

  1. Walk the client through a loss.  Once you have identified a loss, ask your client: “What happened inside your business because of the loss?”  This becomes a dollarized basis for your factors.
  2. Don’t forget the impact to “Brand”.  In the event a client has a loss that disrupts their business, some of their customers are also affected (deliveries not made, jobs not completed, bad press, etc.).  The brand loss can be the most expensive part of the indirect loss costs.
  3. Always focus on Business Risk Impact.  This is what makes the indirect loss costs real on the client’s financial statement.  They must understand how it translates to productivity, profitability, competitiveness and human capital expense.
  4. Reconfirm an understanding prior to proceeding with a TCOR or TCHC presentation.  Without this, your presentation will go flat.  This is because the client has not been motivated to remove these indirect loss costs.

So, the next time you intend to really help a client reduce their TCOR or TCHC, start the discussion around the client’s business operation and how losses impact their Business Risk.  As I have always said: “Any jamoke with an insurance license can discuss policies, coverages and carriers”.  It takes a Consultative Broker™ with real skill to focus on a client’s actual costs.  Indirect loss costs are the meat of the Consultative Brokerage™ value sandwich.  Make mine prime rib!

- Rob Ekern

For more information on how to quantify TCOR, manage projects, build a value proposition, and consistently deliver stewardship reports and new business presentations to your customers, check out the Major Account Development System (MADS), an on-line consultative broker's toolkit. Available now!

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