An old hat that can teach new tricks

Risk management has become very important for insurers as many of the world’s top risks are becoming increasingly interconnected. Addressing these challenges becomes difficult as technology significantly speeds up response time.

Yet, the financial services industry cannot drop the ball when it comes to risk management. This was a topic that was discussed at an IIG Insights seminar. 

From then till now

Risk management came under the spotlight for the first time in the 1950s when the US was in the middle of the Cold War and was embroiled in The Space Race with the former Soviet Union. This was followed by one of the worst economic recessions following a World War.

“Fast forward 69 years and we see that the 2008 Global Financial Crisis once again highlighted the importance of risk management. Currently, it is being driven by the current Trade War between the US and China as well as climate change and cyber security concerns, said Peter Links, Vice President of Strategic Risk Consulting at Marsh. 

Links added that since the GFC, there has been an increased focus on improved  governance, which is the cornerstone of risk management. 

Risk innovation

Risks are becoming more interconnected, which makes addressing them a challenge.

Because of this, insurers need to become innovative when developing systems and processes that can achieve this. Historical practices may prove to be wholly inadequate in a modernised risk environment. 

Historical practices, when it comes to risk mitigation, included an independent risk identification and assessment process that were designed to provide risk reporting to leadership and the board. This process was independent of operations and performance management. The evaluation of current exposures based on historical perspectives points out that there needs to be a modernised approach when it comes to risk mitigation. 

“As the world modernises, so do risk management practices. These include direct links to key risks to performance drivers, enhanced risk analysis using data analytics, and formalized operational risk frameworks,” said Links. 

He added that modern risk management practices go a long way in defining future trends and establishing predictive indicators which allows scenario analysis and stress testing. 

Predictive analytics

According to Links, predicative analytics will have a big impact on risk management in the future. 

“Predictive analytics is the utilization of data, statistical algorithms and machine learning methods to identify the probability of future outcomes based on historical data. Why is it so important now? It is currently being driven by growing volumes of data which is influenced by the growth of the Internet of Things (IoT). There is faster, more efficient and cheaper access to computers and digital platforms which means that there is real time access to information. Software is becoming increasingly user-friendly and there is a prevalence in the need for economic differentiation due to an increasingly competitive economic environment,” said Links. 

How can we use it effectively? Links said that there is a significant improvement of operations particularly when it comes to price, resource and inventory management. 

“Predictive analytics also has a role to play in fraud detection where companies can improve criminal pattern detection and crime prevention. It also has a role to play in client growth optimisation where it can determine consumer responses, retain profitable clients and promote inter-divisional cross-sell opportunities,” said Links. 

Key benefits

There are a lot of key benefits that predictive analytics can offer insurers outside of risk management. 

It allows insurers to tweak market strategy. Predictive methods look at patterns embedded in data while not trying to fit recordings in predefined categories. Products can be targeted to an existing group from the market. "It’s an inside-out approach which will make clients feel more connected to the company," said Links. 

Predictive analytics can also lead to improved claims processing. "Predictive analytics technology can help insurers prevent fraudulent claims by analysing all the circumstances involved in the event," said Links. He added that it could identify the difference between the fault of the client and a genuine misfortune. 

Editor’s Thoughts:
Risk management will only grow in the future. What is your approach towards risk management? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].