James Jorgensen
Principal & Executive Vice President, Business Insurance
Entrepreneurs understand that risk is an inherent part of running a business. However, managing the associated costs—or the total cost of risk (TCOR)—is key to sustainable growth and long-term resilience.
TCOR includes several cost components, including insurance premiums, retained claims costs, broker fees, loss control, and other risk management strategies. As a company grows, its TCOR strategy must also evolve, adapting to the unique challenges and opportunities at each stage.
From startups with limited capital to large enterprises exploring alternative risk transfer solutions, businesses must adjust to balance protection and cost efficiency. The challenge lies in understanding which tactics offer the most impact at each stage of growth and how to implement them effectively.
Startup phase: balancing protection and cash flow
In the early stages, cash flow is king. Startups usually depend on basic insurance programs, often with higher premiums and lower deductibles due to their risk profile, to protect against potential liabilities.
While important, this approach can strain limited resources, so it’s crucial to adopt a strategic plan:
- Prioritize essential coverage: General liability, workers’ compensation, property, and cyber insurance are critical, especially for businesses that handle sensitive customer data, property, and other assets.
- Assess and align risk coverage: A thorough assessment can help identify the most critical areas of exposure, prioritize coverage accordingly, and avoid overpaying for unnecessary protection.
For example, a tech startup may purchase a broad general liability and professional liability policy to protect against potential exposures. While necessary, if the coverage doesn't align with the company's actual risk profile, it can divert important funds from product development and leave gaps in protection.
Growth stage: optimizing risk protection and cost management
Companies could explore larger retention programs, such as increasing deductibles, to lower premiums while still maintaining adequate protection. This shift requires careful consideration of the company’s financial stability and an analysis of past claims and risk tolerance for future growth. Performing Total Cost of Risk analytics will help companies identify optimal program structures from an economic perspective, which will need to be balanced with the terms and conditions of the coverage.
A growing manufacturing company might increase its deductible from $1,000 to $100,000. This can lower overall premium costs but requires the company to absorb a large deductible before claims are paid. To support these changes, businesses should analyze past claims data, implement proactive risk management initiatives, and negotiate coverage terms that align with their unique exposures.
Many mid-sized companies are starting to integrate employment practices liability insurance to address risks related to employee lawsuits, which tend to rise with workforce expansion, according to the Insurance Information Institute.
Reaching maturity: proactive risk management for long-term stability
Established companies benefit from integrating proactive risk control measures to reduce exposure and enhance operational longevity. These measures could include safety programs, loss control initiatives, and regular risk assessments.
An established construction firm investing in comprehensive safety training not only reduces the chance of workplace accidents but also may lower insurance premiums in the long run. Mature businesses can adopt these measures to help reduce claims frequency and improve financial performance.
Large enterprises: finding greater control with alternate risk strategies
As a business grows, it may need more control over its exposure, adding alternative risk transfer solutions to the mix:
- Enterprise risk management frameworks: This company-wide oversight of internal and external plans helps identify, assess, and analyze key business threats while minimizing impacts.
- Self-insurance programs: This option allows companies to pay claims within their retention instead of relying on insurance, offering greater control over costs, claims data, and management through market pricing swings.
- Captive insurance companies: Group captives, protected cells, or single-parent captives can be set up to control costs and protect companies from a hard market or fluctuations in pricing.
A captive is a viable option for companies that have a favorable loss history with low claims and a strong risk management program. This strategy helps businesses achieve long-term cost predictability while gaining better control over claims management and loss prevention strategies.
Evolving risk strategies for sustainable growth
No matter the size or industry, businesses need to continually reassess their TCOR approach to stay aligned with their growth trajectory and the changing risk landscape. A dynamic approach enhances financial stability and strengthens a company's appeal to investors, lenders, and other stakeholders.
Proactively managing this allows businesses to protect their assets, boost operational efficiency, and set themselves up for long-term success at every stage of growth. Strategic risk management isn’t just about cost control; it’s about creating a durable foundation for sustained expansion and profitability.
Marsh McLennan Agency’s expert team helps companies, regardless of where they stand in their growth trajectory, find each component of their TCOR and identify cost-reduction opportunities. Connect with a Marsh McLennan Agency representative to explore how we can help your business.
