The sentence that you present for revision: "That, in itself, can be a shock" has no grammatical errors. The problem with MS Word is that it sometimes attempts to fix grammar mistakes based on specific contexts under which it is programmed. This being said, do not trust a self-correcting computer program 100%. The margin of error is always there.
If you were to write "That, in it, can be a shock" it would take the sentence out of context because it would be referring to something inside something else that "can be a shock". Yet, it is understood that what the sentence meant to say was that the subject of the sentence which is referred to with the demonstrative adjective "that" is indeed what "can be a shock".
So, keep rolling. You are doing well! Read the article included in this answer so you can see how grammar checkers aren't always reliable.
I don't know the context of this sentence, but I do not detect in it any grammatical error.
The subject of the sentence is that; the predicate is can be a shock. There is certainly nothing ungrammatical about saying: That can be a shock.
The words in itself are a parenthetical modifier to the word that. These words elaborate that it is not something peripheral about the that that can be a shock; rather, it is the that itself that can be a shock.
I don't know much about MS Grammar Check, but I think it's made a mistake in this case. By the authority vested in me by Mr. Shackle, my 7th-grade English teacher, I pronounce your sentence to be grammatical.