weak company or stressed scenario “forced sale of assets”, discounted at a higher rate may become necessary to meet the payments thus causing loss to the company. A Systematic Approach to Risk Management: Insurance Industry By Shriram Gokte Background Insurance companies are in the business of taking risks. The common examples are: 1. The actuarial department has a key role in fixing price (premium) in such way that both the insurer and the insured are benefited to the maximum. ERM involves measuring analyzing and modeling so as to help identifying causes of risks, the level of risks, relationship between risks and assessment of economic impact and on the balance sheet. Moral hazard it is another area of concern for insurers. It usually involves large number of claims and huge amount in aggregate and hence reinsurance has become more restrictive and costly. Assets generate income, and liabilities relate to payment obligations. ALM does not imply that assets should be matched as closely as possible to liabilities but the mismatch shall be effectively managed to contain the damages if any arising therefrom. Most speculative risks one dynamic risk with the exception of gambling situations. He studies important statistical data and determine the rates that would be adequate to meet all the claims and expenses as they occur and provide for a profit margin. The policy holder expects the premium to be low and benefits attractive and in the case of traditional life insurance policies a reasonable return on their savings. Types of Life Insurance Policies. Life insurance companies, under the supervision of an actuary, estimate at the beginning of each financial year, the number of death claims that can be expected during the year. ERM is primarily meant to focus on all actions insurer takes to manage its risks on an ongoing basis and ensure that it stays within its risk tolerance level. Bottomline: You need the security of insurance. Risk retention, risk transfer, expense control are important part of managing risk. There are certain insurance risks that have coupled this industry and the failure to do something to avert the risk can be detrimental to the success of your insurance company. Copyright 10. ERM links day to day administration with long term business goals. The company should therefore have a prudent investment policy emphasizing on safety and income, besides complying with regulations on investment which are compulsory. In fire insurance history of frequent accidents in the premises of the proposer may indicate presence of moral hazard. If it is commercial segment it is all about business, if it is automobile it is all about Car/Bus/ Truck and related matters and so on. It should also cover relationship between the insurer’s risk appetite and risk management process. Offer support when developing a go-to market strategy, e.g. The following are common types of business risk. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Manage The Risks Facing Your Business With LogicManager’s Risk Management Software . The risk involved in these two activities can shake the foundation of the company and when combined with other risks mentioned above it accelerates or accentuates deterioration and even demise of the company. Moral hazard is suspected when there is ground to doubt about the buyer’s intention on availing insurance protection. With regard to Catastrophe exposure management must begin with the availability and accuracy of exposure data. Speculative risks are no subject of insurance, and then are therefore not normally insurable. Actuarial risks may be caused by different factors such as mortality rate variance, perils and certain variance. There are many uncertainties and imponderables in the calculations which causes acturial risk. In addition to these steps a detailed analysis of claims paid should be made periodically on the causes of accident, destruction, loss etc. At a minimum it involves integrated management of underwriting risk, market risk, credit risk, operational risk, liquidity risk and reputation risk. The main types of market risk are equity risk, interest rate risk and currency risk. Qualitative assessment should also be done. Scope of operational risk is very wide. So also terrorism insurance and motor third party liability is done by pooling arrangement so as to share the loss in an equitable way among several insurers. In life insurance, moral hazard can be doubted when insurance is applied for a large sum (compared to the income) or at advanced age or nomination is in favour of a stranger. Usually aviation insurance is jointly done by more than one company. 2. life cover. Thus, adverse selection arises because it is too laborious to collect all information on the insured perfectly. This has a great impact on the amount of revenue which will be raised by the insurance company. Primary companies managed their catastrophe exposures simply by purchasing appropriate reinsurance and ignored their concentrations of exposure. IRDA regulations stipulate that a life insurer shall not carry on business of insurance without an appointed actuary duly approved by the Authority. In simple words risk is danger, peril, hazard, chance of loss, amount covered by insurance, person or object insured. Motor accidents occur because of poor maintenance of roads by the government and a substantial increase in traffic without increased in road network. The … There is a lot to do when faced with this risks. Operational risk is the risk of loss resulting from inadequate or failed internal processes and systems. Products vary between companies, and consumers should always read their Product Disclosure Statement (PDS) before they purchase cover. In Extreme cases, reputation risks may lead to bankruptcy. Almost all the insurance companies have reinsurance arrangements with major Reinsurers A portion of the risk is ‘ceded’ to them. Reinsurance companies suffered huge loss, and hence reacted swiftly by steeply raising prices and retentions with restriction on limits. of experience and work in the insurance industry; and the risk assessment processes. You may consider current statistical data, some past experience and future possibilities but in the future, there will be a great variance in the speculated and the risks amount. Strategic risks in the insurance sector require excellent strategic management skills to avert risks. We may consider the damage to a ship due to a cyclone or even sinking of a ship due to the cyclone. 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