Do As We Say
Risk management has been a skill offered by insurance carriers since the inception of the industry.
The information they have accumulated over centuries has evolved to bring sharp focus on the needs
of businesses and insurance customers. As the industry changes toward more prevention of risks, are
insurance carriers following their own advice? We asked the opinion of three leading insurance analysts:
Monique Hesseling, partner, Strategy Meets Action; Nicolas Michellod, senior analyst with Celent’s
insurance practice; and Mitchell Wein, vice president research and consulting, Novarica.
What Do You Think?
This month’s question:
Insurers have handed out advice on risk management for years, but how well do
they follow their own advice concerning internal risks?
Since the financial
global crisis of
(ERM) has become
important function within insurance companies.
Although the big national and global
insurers have had ERM officers and departments for a long time, the financial
crisis and resulting governmental and
regulatory oversight has elevated the
ERM function within insurers of all sizes.
Governments and regulators all over
the globe have taken steps to ensure
that insurers manage their own risks adequately. In the U.S., the NAIC adopted
a significant new addition to insurance
regulation in 2001: the Own Risk and
Solvency Assessment (ORSA), which will
require insurance companies to conduct
their own assessment of their current
and future risks through a detailed, inter-nal-risk self-assessment process.
Large- and medium-size insurers
will be required to conduct an ORSA
starting in 2015. Either by choice, culture,
philosophy or nudged on by regulators,
insurers have increased their focus on
internal risk management significantly
and can clearly state they do follow their
Insurance has faced
difficult times since
the collapse of the
in 2008. Some
were running effi-
cient risk manage-
ment principles. Insurers have identified
key challenges including:
K The need to go beyond pure insurance risk management. Insurers have
neglected specific risks that are more
difficult to evaluate such as operational risks.
K The necessity to assess the external
environment. Insurers understand the
need to run economic scenario simulations in order to anticipate consequences on their business.
K The importance to diversify, notably
through product innovation. Insurers
understand diversification of their
portfolio and product innovation help
mitigate risk. This is why an increasing
number invest in emerging technologies such as analytics and telematics.
Insurers are on the right track and we
believe the industry has gained strong
expertise in managing risk over the past
Insurers have been
in the business of
managing risk exposure and pricing
to cover risk since
ago. Today, insurers
cover a multitude of
risks, which include risks to automobiles,
homes, a person’s health, the probability
of death, catastrophes, as well as special-
ty areas like terrorism, and cybersecurity.
The list keeps expanding, 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 operational risks.
Risk is constantly evolving for an insurer. A carrier’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.