RISK MANAGEMENT IN INSURANCE : CRITICAL AREA OF CONCERN
The recent changes in the insurance market and socio-economic environment have meant that the risks that insurers now find themselves facing have evolved. These range from volatile investment conditions, increases in longevity and mortality risks through to terrorism threats and climate change. As a consequence, stakeholder focus on these risks and the way in which they are managed has also sharpened. It is, therefore, increasingly important that insurers fully understand the risks to which they are exposed.No one likes to think about the bad things that can happen to them, but for many people, unexpected shocks are a daily threat. Low-income families are particularly vulnerable to potential losses from a host of situations and may be ill-prepared to cope financially with their negative impact. Small and frequent shocks, such as children’s illnesses, may only have short-term impact, while more significant events, such as the destruction wrought by natural disasters or the death of an income earner, can bring financial ruin. Such crises wipe out the hard won gains painstakingly accumulated over time. As families go deeper into debt and/or sell assets to pay their unexpected expenses, their climb out of poverty can easily be thwarted. Hence ,anticipating risk and managing risk is of paramount importance not only for an insurance company but for an individual also.
Coping with Shocks: Reaction or Protection?Shocks are not new; neither are the pain and expense that come with dealing with them. From country to country, the list of risks is very similar: accident, illness, death of an income earner, fire, theft, natural disaster and economic shocks caused by events such as hyperinflation. The consequences of these risks are significant and may include grief, financial hardship, loss of income, loss of productive assets and lost economic opportunities.
What is Risk ManagementSimply put, risk management is a two-step process – determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives. Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit.For insurance companies , knowing and anticipating risk is of paramount importance to be successful in the business. Risk management ensures that an organization identifies and understands the risks to which it is exposed. Risk management also guarantees that the organization creates and implements an effective plan to prevent losses or reduce the impact if a loss occurs. A risk management plan includes strategies and techniques for recognizing and confronting these threats. Good risk management doesn’t have to be expensive or time consuming; it may be as uncomplicated as answering these three questions:
What can go wrong?What will we do, both to prevent the harm from occurring and in response to the harm or loss? If something happens, how will we pay for it? Below a series of questions which senior management may wish to consider when reviewing the effectiveness of their own risk management practices.
Questions for senior management to consider
- How can the board and senior management provide more effective and informed oversight of your insurance company’s risks?
- Are risk considerations given appropriate profile in your company and strategic planning processes?
- What should your insurance company be doing to realise the benefits of further integration of risk, capital and business management activities?
- How can your insurance company improve the knowledge and understanding of your board and senior management to raise the quality of discussion and challenge on more complex matters?
- Are your company’s risk appetite statements and risk policies sufficiently comprehensive and well understood and workable?
- Does your firm have a clear view of how it wants to develop its risk management practices?
- Are there enough opportunities for independent and informed challenge to risk management processes and outcomes?
- Is there enough objectivity in your risk identification and assessment processes?
- Does your firm’s management information provide sufficient and timely material on risk issues and does it prompt appropriate action?
- Is there enough clarity of how responsibilities for risk management activities are allocated in your firm?
Benefits to managing riskRisk management provides a clear and structured approach to identifying risks. Having a clear understanding of all risks allows an organization to measure and prioritize them and take the appropriate actions to reduce losses. Risk management has other benefits for an organization, including:
- Saving resources: Time, assets, income, property and people are all valuable resources that can be saved if fewer claims occur.
- Protecting the reputation and public image of the organization.
- Preventing or reducing legal liability and increasing the stability of operations.
- Protecting people from harm.
- Protecting the environment.
- Enhancing the ability to prepare for various circumstances.
- Reducing liabilities.
- Assisting in clearly defining insurance needs.
- An organization should have a risk management strategy because:
- People are now more likely to sue. Taking the steps to reduce injuries could help in defending against a claim.
- Courts are often sympathetic to injured claimants and give them the benefit of the doubt.
- Organizations and individuals are held to very high standards of care.
- People are more aware of the level of service to expect, and the recourse they can take if they have been wronged.
- Organizations are being held liable for the actions of their employees/volunteers.
- Organizations are perceived as having a lot of assets and/or high insurance policy limits.
- Involvement of the board and senior management in risk management
- Establishing and communicating risk management objectives while forming an opinion on their credit rating.
- Setting risk tolerance and key risk metrics
- Setting roles, responsibilities and oversight
- What can happen – this is about identifying all negative consequences for the risk
- How and why it can happen – this is about identifying scenarios and events that may precipitate negative outcomes.
- Credit risk
- Market risk
- Underwriting risk
- Operational risk
- Strategic risk
Identifying Risks a challenge fir Insurance CompaniesInsurance company faces major challenges while identifying risk.To identifying risk is a matter of serious concern. If risk is not properly identified, it may lead to serious problems for the smooth functioning of the insurance company. The most solution expert says is ERM programs.ERM programs all start out with a suggestion that you must identify your risks.Risks should be identified within several major categories. Here is a typical list of categories for an insurer:
- Insurance Risks
- Investment Risks
- Foreign Exchange
- Other Counterparty Risks
- Operational Risks
- Human Resources
- Strategic Risks
- Group Risks
- Top Down
- Bottom Up
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