Risk management is not a static concept

The manner in which insurance companies identify, analyse, manage, assess and respond to the risks that arise both in and outside of the insurance sector has changed significantly of late. In this, their third instalment on risk management, Centriq invest

In response to today’s dynamic risk environment insurers have moved away from ‘risk management only’ strategies to those that ‘influence the risk’ in the hope they can proactively reduce it. This requires that various departments within insurance companies work closely together to:

• Acquire an intimate knowledge of the challenges their markets face;
• Gain an in-depth understanding of risk owners’ prioritised risks;
• Elevate loss prevention on all levels;
• Align their business terms with risk reducing behaviour, including those related to supply chain, regulation, reputation and operations;
• Find innovative solutions by continuously updating and reporting on the progress made in terms of risk mitigation measures and controls;
• Analyse all feedback with regards to internal processes, people and systems;
• Evaluate emerging trends to manage risk exposure on a continuous basis;
• And generate up-to-date and adequate data – a pre-requisite for effective risk management.

Over time the lines between enterprise-wide risk management (ERM) and underwriting risk management have become increasingly blurred. The successful company will adopt a two-pronged approach to continuously identify, assess and manage these risks concurrently...

Informed oversight

Firms have to look for ways to raise, strengthen and improve their standards by asking themselves the following questions:

• How can we provide effective and informed oversight of our risks?
• Do risk considerations feature appropriately in our business and strategic planning processes?
• What should we be doing to realise the benefits of further integration of risk, capital and business management activities?
• How can we improve the knowledge and understanding of our board and senior management to raise the quality of discussion around complex matters?
• Are our risk appetite statements and risk policies sufficiently comprehensive, well understood and workable?
• Do we have a clear view of how we want to develop our risk management practices?
• Are there enough opportunities for independent and informed challenges to risk management processes and outcomes?
• Is there enough objectivity in our risk identification and assessment processes?
• Does MI (Management Information) provide sufficient and timely material on risk issues and does it prompt appropriate action?
• Is there enough clarity on how responsibilities for risk management activities are allocated?

On slippery footing

These questions will empower insurers to prepare for, manage and address the new wave of risks identified by The Centre for the Study of Financial Innovation (CSFI) recently. The organisation’s latest Insurance Banana Skins survey, conducted in association with PwC, singles out new regulation as the clear risk leader across all major global insurance markets. Concerns were also raised around low interest rates, intense competition and the European Union’s Solvency II directive.

The incidence of natural catastrophes, political risk, and growing concerns over the solvency of Euro-zone countries also featured, with the shortage of talent emerging as a high priority. Despite the high incidence of floods, bombings and oil spills over the last couple of years, concern about climate change, terrorism and pollution risks remained low as these are viewed as manageable underwriting risks – less threatening to insurers than regulatory change, capital requirements, macro-economic trends, investment performance and natural catastrophes.

Only 5% of the respondents interviewed, felt that the industry was well prepared to face the risks identified, underpinning the importance of IT platforms as primary risk management tool.

It is essential for companies to align the underwriting and claims processes to fully support risk management strategies and processes going forward.