Question

Risk management may be viewed as critical to the success and viability of insurance companies and thus many of those companies have adopted strategies to manage risks which they are exposed to. in 2500 words

• Identify two (2) risks which may affect insurance companies.
• Discuss the importance of establishing an effective risk management policy in an insurance company giving one example of a risk management strategy used by insurance companies.
• What is the role of insurance legislation in effective management of insurance companies? Illustrate with one example of a specific insurance legislation.

Answer 1

a. Two Risks which may affect Insurance Companies are following:

1) Underwriting Risk- Underwriting refers to a process undertaken by the insurance companies to assess the feasibility of customer to raise capital. It involves measuring the risk in the venture and the premium to be charged for such risk.

2)Credit Risk- Credit Risk refers to the uncertainity pertaining to the counter party's in ability to meet its obligations.

b.Effective Risk Management Policy is the key to succeed in insurance sector. Since Insurance Sector has a vast variety of risk it's better to have risk management policy in place as it will:

1)Prevent wastage of resources of company

2)Helps in Better Customer Service since the company will be able to assess and mitigate the risk with well established risk management program

3)Provide a wide array of scenarios and potential events while allowing calculated risks to be taken to increase profitability.

Insurance Companies now-a-days are using Enterprise Risk Management where in the top level management design governance structure to identify potential events that may affect the organisation and devise policies to manage risks.

c.Since Insurers are in the business of public money it is well important to have laws in place. Insurance regulations play a key role in protecting the interest of consumers. They help in maintaining insurer solvency by keeping a watch on its operations and it also help in checking the premium charged by insurers to customers.

A particular example would be the Insurance Regulatory Information System used by National Association of Insurancd Commissioners to determine the financial credibility of insurance companies. It uses the financial statements filed by Insurers to calculate ratios to determine the solvency and profitability of Insurers.