Management of Risk by Individuals and Insurers

Insurance Risk Management is the assessment and quantification of the likelihood and financial impact of events that may occur in the customer’s world that require settlement by the insurer; and the ability to spread the risk of these events occurring across other insurance underwriter’s in the market. Risk Management work typically involves the application of mathematical and statistical modelling to determine appropriate premium cover and the value of insurance risk to ‘hold’ vs ‘distribute’.

Risk = Probability x Severity

Probability is the likelihood of an event occurring, and severity is the extent and cost of the resulting loss.

Speculative Risk: Risks where the possible outcomes are either a loss, profit, or status quo. It includes things like stock market investments and business decisions such as new product lines, new locations, etc.

Pure Risk: Risks where the possible outcomes are either a loss or no loss. It includes things like fire loss, a building being burglarized, having an employee involved in a motor vehicle accident, etc.

Steps to Implement Risk Management:

• Quantify and prioritize: Risk mapping is one way to do this. Essentially, you chart all of the identified risks on the map. The map will make you aware of those risks on which you need to focus. Work with your broker to make sure that you are covered for all of the appropriate risks and look for ways to prevent and mitigate these risks. The image on the right is a sample of a common risk map. However, risk maps are often altered to reflect organizational needs.
• Risk identification: It is a good idea to chart your risks in a way that allows you to identify the more common and serious risks so that you know the areas to which you need to commit resources.
• Be risk sensitive, not risk adverse: Being risk sensitive is not the same as being paranoid. Realize that there are risks associated with everything. Take a deliberate and methodical approach to dealing with risk, while at the same time being realistic.
• Identify risk in business decisions: Identifying risks in business decisions is much the same as with the process of identifying any risk. The key is to be thorough and use all the sources available. These risks can be prioritized and mapped in the same way as all other risks.

Property damage

Insurance companies are often concerned with protecting their clients’ physical assets, including their brick and mortar properties. While natural disasters and other events may not destroy property entirely, they always pose a significant threat to a business’ ability to operate normally.

Mitigation options:

• Implement controls for mitigation and prevention.
• Invest in adequate insurance coverage.
• Develop a foolproof business continuity plan that is proactively communicated with your entire organization.

Product or service issues

When customers feel that their product did not meet expectations, challenges and risks are inevitable.

Mitigation options:

• Implement ERM software into your organization to prevent negligence claims.
• Invest in professional liability insurance.
• Conduct vendor due diligence to prevent third party providers from producing products or services that don’t meet your organization’s standards.

Property damage

Insurance companies are often concerned with protecting their clients’ physical assets, including their brick-and-mortar properties. While natural disasters and other events may not destroy property entirely, they always pose a significant threat to a business’ ability to operate normally.

Mitigation options:

• Implement controls for mitigation and prevention.
• Invest in adequate insurance coverage.
• Develop a foolproof business continuity plan that is proactively communicated with your entire organization.