HOW INSURANCE COMPANIES UNDERTAKE RISK MANAGEMENT

Risk management refers to the system of identifying, analyzing, treating, and monitoring the risks involved in the daily operations of the organization. Risk management helps managers to effectively allocate the available resources so that they can efficiently meet the organization’s set objectives. There are two ways that insurance sellers use to undertake the risk management process: first by implementing the risk management practices within their operations in their own organization, and second by providing risk management consultation to their clients so as to manage the risk exposure of their insured pool.

Operational risk management within the insurer’s own premises. Risk management in the insurance business refers to the assessment of the probability of certain events occurring to the client’s businesses or themselves that will require settlement by the insurer. Risk management will enable the insurer to spread the risk of these events occurring across their pool members. As a business/ organization, insurance sellers should have an enterprise risk management system in place so as to protect their investments for the future of the business.

• Compliance risk, this refers to the insurance company’s obligation to comply with the regulatory authority’s rules and regulations, and the laws of the country and international organizations’ quality standards. Risk management processes are put in place so as to always ensure compliance, as failure to do so could affect the organization’s reputation and cost the company through penalties and other charges by the respective correctional government agencies. Companies hire compliance managers to make sure they operate within their legal limits at all fronts including financial, operational, employees’ rights, environmental and fair treatment of customers.
• Control systems to establish suspicious purchases that are related to money laundering or to discover fraudulent claims. Money laundering refers to the engagement of an individual in the conversion, transfer, concealment, disguising, using, or acquisition of money or property that is known to be of illicit origin, and in such engagement intends to avoid any legal consequence of such action. Most criminals target financial institutions like insurance companies to quickly clean their money, hence insurers must have control mechanisms in place to identify such acts. On the other hand, fraudulent claims cost insurers a fortune as they settle for fabricated claims. Insurers should have control mechanisms to check for the validity of the claims.
• Customers’ satisfaction, insurance sellers should have a control mechanism in place to check for the quality of their customer services. Customers should be the center of focus for the insurance sellers because without buyers their operations would cease to exist. Insurance sellers also compete amongst themselves for the same customers, hence it is important for the insurers to maintain a high standard deliverance of the customer experience.

Risk management consultation to clients. Insurers have a duty of providing risk management advice to their clients on how to identify the risks they are exposed to, and how to manage and control such exposures. It is in the insurer’s best interest that the insureds have protection against risks as this will directly reduce the insurer’s liability through claims settlement of avoidable losses. The following are some of the ways the insurer can advise their clients with regards to risk management of their businesses.

• Installing security systems such as electric fences, hiring professional security guards, and installing security alarms. All these protective fixtures will protect the client against various risks, with the main one being theft. Having protective fixtures around the house signals a good actuarial risk to the insurance company and the underwriter will likely award the insured a discount on the premium.
• Fire extinguishers and fire alarm protect their businesses and properties against the risk of fire. Fire extinguishers reduce the risk of accidental fire from getting out of control and causing major damages and loss. Fire extinguishers and fire alarms are in place as a way of reducing the fire risk and not stopping it entirely.
• Insurers may also suggest alternative risk mitigation mechanisms other than the transference of the risks to a third party through insurance. Some risks have a low-frequency rate of occurring and a low impact when they occur. Transferring such risks will be a waste of resources, and that is why insurance should advise the clients to retain such risks and self-insure.

Insurance companies have risk management departments with professionals who advise both the company and their insured clients on better risk management practices. The risk management department is in charge of developing the risk management framework that will be used by the insurance company and is responsible for training every employee within the company on their risk management obligations. Insurance sellers should conduct thorough research on the risk proposers so as to not expose their pool members to bad risks.

We live in an ever-changing world where we are forced to deal with uncertainty every day, that is why risk management is very crucial to organizations of all sizes. Insurance sellers benefit a lot from having a strong risk management framework in place. Risk is a necessary part of doing business and it cannot be avoided, that is why governments and authorities alike require solid evidence of good risk management practice from organizations. The best way to implement a successful risk management system at the insurance companies is to conduct proper training for all the employees so that they can fully understand and implement the risk management practices for the benefit of the organization and their own advantage.