Financial Risk Management for Insurance Companies Global demographic changes and calamities such as the Asian Tsunami, the swine flu, Hurricanes Katrina and Rita, and the avian flu, have forced domestic and international insurance companies to focus not only on what products they offer but also how to improve their asset and liability management, along with their financial risk management processes and systems. Increasingly, insurance companies have become very active in utilizing a wide range of OTC and exchange traded derivatives to hedge their market and credit risks.
The last few years have seen resurgence in the issuance of insurancelinked instruments, such as property catastrophe bonds, securities funding life insurance reserves, insurance risk swaps, and Industry Loss Warranties (ILWs). Insurance company risk managers and financial professionals focusing on the insurance sector would learn the process by which insurance companies are identifying, measuring, monitoring and controlling their financial risks. This course will be supplemented by domestic and international case studies and recent articles on topical themes in the insurance sector.
Ref: http://www. nyif. com/courses/risk_1010. html Process of Risk Management: Risk Identification Risk Measurement Risk Control Risk Transfer Risk Financing Risk Retention 2 XIMB-PGPBFS (2010-11) Risk management in insurance IARM “Risk Management is the Identification, Analysis and Economic Control of those RISKS which can Threaten the Assets (Property, Human) or the Earning Capacity of an Enterprise”.
ENTERPRISE OPERATIONS FINANCIAL STRATEGIC KNOWLEDGE PROCESS CAPITAL STRUCTURE STAKE HOLDERS INTELECTUAL PROPERTY INFORMATION MANAGEMENT SYSTEMS.
PHYSICAL ASSETS REPORTING GOVERNANCE PEOPLE CREDIT AND LIQUIDITY MARKET STRUCTURE LEGAL MARKET Risk Assessment in Bajaj Allianz Insurance Insurance: FI A CIAL IMPACT: Threshold Limit to be decided based on Size of the corporate. PROBABILITY OF OCCURRE CE: Organization history & Industry Experience to be considered 3 XIMB-PGPBFS (2010-11) Risk management in insurance IARM Handling Risk: Risk Levels Low & Medium ormal Monitoring at the operational level High Close control of all potential contributing factors by the Risk Management Team
Very High Risks of this level should be actively tracked for decisions by the Risk Management Committee. Enterprise Risk Management: 4 XIMB-PGPBFS (2010-11) Risk management in insurance IARM Risk management in Insurance: • • All Risks are not Insurable Essentials of Insurance o Insurable Interest o Utmost good faith Procedure for Insurance o Identification of Risks o Quantify the Insurable value o Evaluate the choices o Proposal o Payment of premium o Policy Documentation Claims Administration System.
Focus Areas for Insurance Management: Identification of Internal & External Pure Risks o Existing Risk Control Measures Review o Risk inspection o Risk Audit Scrutiny of Existing Insurance Covers o Coverage o Rates & Deductibles (Compulsory self insurance) Defining Standard SOP for Claims Control o Guidelines on documentation Key Areas of Consideration: Choice of Insurer o Industry Rating o Claims Settlement ability o Sustainability of the company o Service levels & infrastructure Choice of Intermediary o Representation of the insurance market o Knowledge of insurance amongst all industry segments o Service levels & infrastructure 5 XIMB-PGPBFS (2010-11).
Risk management in insurance IARM Emerging Challenges: De regulation of Indian Insurance market Global markets impact on Local market Options for self insurance Market driven pricing Risk Management and Insurance Planning: Every organization is exposed to various risks. While many of them are pure risks like Fire, explosion, chemical release etc. , some of them are speculative. Pure risks are Handled as operational and safety issues by professionals and finance personnel Have to address the risks arising out of failure of above operational and safety Measures.
Together they need to ensure that the organization is able to withstand any Risks or failure of systems and can continue its operations without much struggle. The Risk Management and Insurance Planning is required for any organization to review their risk management strategies and to opt for risk transfer measures like availing Insurance cover etc. Many a times the coordination between the technical or operational Departments and finance department is difficult and an unbiased study on technical risk Management measures adopted and insurance practices followed will help the Management of the organization to manage the risk effectively and profitably. Risk management for micro insurance: Micro insurance is a financial product that offers another form of protection Against the possibility of a loss.
Micro insurance also applies the idea of pooled risk, just on a bigger scale. Instead of sharing the risk among a small group of Community members as mutual aid groups do, micro insurance spreads the risk to a much larger number of people (i. e. , policyholders) who are more diverse in where they live, what kind of work they do, and how much money they earn. When a lot of people from many different places buy the same insurance policy, the money they pay for their insurance policies goes into one fund that the Insurance company uses to pay benefits to those policyholders who are hit with a crisis. In this way, everyone pools their funds and shares the risk of a crisis happening to any one of 6 XIMB-PGPBFS (2010-11)
Risk management in insurance IARM them. Micro insurance is a risk pooling Mechanism tailored to the needs of low-income families in terms of costs, Duration, coverage and delivery. Purchasing micro insurance is an action to take Before a crisis occurs in order to protect against loss and give peace of mind. In contrast to the familiarity of a community-based mutual aid society, people who buy insurance must place their trust in a commercial entity. It is the insurance company, not the policyholders, that manages the funds, collects the premiums and pays out the claims. When an insured event happens, one has to trust that the insurance company will respond.
Thus, one must choose an insurance company that is reputable, financially sound, and regulated in some way. There are many different types of insurance for each of the risks most people face. Property insurance will protect a home, business or other valuable assets against theft and damage due to fire or natural disasters. In many countries, the government requires anyone who owns a motor vehicle—such as a car or motorcycle—to purchase vehicle insurance. Health insurance can protect one against the high cost of medical care. Some health policies will only pay for the catastrophic events that require expensive hospital stays and treatment; others will pay for routine medical care, including regular check-up visits to the doctor.
Life insurance provides a payment to the family of the policyholder upon his death, allowing the family to better manage the loss of his income. Many microfinance institutions require that borrowers purchase a “credit-life” policy which will pay the borrower’s outstanding loan balance should the borrower die before the end of the loan term. The confusion about what insurance is, how it works and how it can help leads to widespread reluctance to purchase insurance or renew existing policies. For many, insurance is a perplexing product. However, people can begin to find the basic answers they need by learning to ask some key questions about insurance. THANK YOU 7 XIMB-PGPBFS (2010-11).