Managing Risk Continues to Evolve for Insurance Carriers
Mitchell Wein | April 27, 2015
Insurers have been in the business of managing risk exposure and pricing to cover risk since insurance evolved as an industry over 500 years ago. These risks evolved over time. Today, insurers cover a multitude of risks that include risks to automobiles, homes, a person’s health, the probability of death, catastrophes like tornado and hurricanes, as well as specialty areas like watercraft, terrorism, aviation, and cybersecurity.
The list keeps on expanding with just about everything being covered in some way, shape or form in the 21st Century. But what about internal operational risks? Insurers have been getting serious around this area as regulations, both domestic and international, become more stringent.
The regulatory and rating agency capital models have essentially “reserved” capital in the event of a risk materializing and causing an insurer to fail. In addition to paying out claims and covering for natural and unnatural catastrophes, insurers are now reserving for various other operational risks including:
- Fraud—false insurance claims, false information on an insurance application, employee theft
- Employment Practices—discrimination, ADA, employee lawsuits
- Insurance Products and Processes—suitability, client privacy
- Business Disruption—damage to facilities due to weather and fire, terrorism, loss of key records
- Technology—loss of data, poor change management, system outages, virus and malware, data theft
- Business Execution—claims and policy processing, customer communication
- Regulatory and Legal Compliance—state regulations, global regulations
- Other—equity, interest rates, currency, real estate
Carriers often will have a chief risk officer that is responsible for collecting risk data from all areas of the firm including claims, underwriting, technology, investments, etc. and quantifying these risks based upon probability of occurring and severity if the risk occurs. The risk mitigation programs are tracked using an executive dashboard which is given to the CFO, CEO and board. Key metrics have been developed to measure progress in minimizing these risks. Under Solvency 2, these risk programs are mandatory.
The major thing to keep in mind is that risk is constantly evolving for an insurer. For example, an insurer’s reputation on Facebook may have a large impact on the insurer’s ability to grow their business. A published data breach from computer hacking could wreck the insurer’s business. Insurers will continue to remain focused on operational risk and continue to evolve their risk and reserve models.
(Mitchell Wein is vice president, research and consulting, with Novarica.)
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