Risk Management

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 Risk and Hazard
▪ “Risk” is defined as “an uncertainty that could have a positive or negative effect on one or
more objectives”.
▪ So, risk is something or some event that can cause harm or loss; in a broad sense, it is the
exposure to events which cannot be predicted with absolute certainty.
▪ So Risk Management is a systematic way of thinking
▪ What is hazard . A potential source that can harm or have adverse effect on a person,
property, or the environment.
The word risk and how it affects the decisions of individual specifically depends on his
attitude and own perception about the hazard.
▪

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▪When risk is said to exist, there is the chance or probability to have at least two possible
outcomes, high or low Risk , that is someone will be harmed by a hazard.
1. At least one of the possible outcomes is undesirable. This may be a loss, to say, something
one possesses is lost (high Risk). If it is known for certain that a loss will occur, there is no risk.

2. It may be a gain smaller than the gain that was possible, it is low risk
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 Eliminate the Hazard at its Source
• When we know that we are dealing with a hazard, then action can
be taken action to eliminate or reduce the risk.

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Substitute with less hazard.
If it is not possible to eliminate the hazard, it may be possible to
substitute it for something less hazardous

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 Hazard Identification

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 Risk Assessment

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 In an industry we have hazards like
Some of the common hazards associated with the Industries

1. Poor general working environment

2. Health problems of employees.
3. Unsafe way to use chemicals and Toxic Material.
4. Purity of the air employee breath.
5. Noise and vibration due to operation of the plant and
machinery.
6. Emission of the radiations.

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7.Electricity.
8. Machinery safety.
9. Fire.
10. Explosion.
11. Use of dangerous substances.
12. Transport and handling risk materials.
13. Maintenance work
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• Insurance is an excellent tool for helping people to
assess, manage reduce and eliminate their risks.
• General insurance companies are required to
undertake extensive risk management activities to
safe guard the money of the the investor and their
investment who provide capital for the insurance
companies to operate, invest and pay claims..
• The Investors are-Policy holders, Shareholders, Institute
investors(Pension funds, mutual funds etc.) Private
equity funds etc.,
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• In todays competitive and free market , the companies are under
pressure to fetch business and face challenges like :
1. Droping the premium rates even with the non-profitable businesses.
2. An Insurance industry works in regulatory environments with limited
options.
3. Companies have to grow which requires focus on sales and expansion
of channels and increasing geographical presence.
4. A higher amount of focus on sales and business expansion has its own
set of risks on business profitability.
5. These risks could adversely affect solvency of the company for their
survival.
• Therefore, the success lies in understanding the external and internal
risks in general insurance industry and the techniques adopted by the
insurers as well as insured to effectively manage their risks.
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 Some examples of the risk are:
a)Production may not reach the planned output.
b) Changes in the methods of production and distribution are another
source of risk
c)Marketing efforts may fail due to lower prices or better products of
competitors.
d)Business finance may not be easily available or may be costlier.
e) Safely crossing the road
f) Building a new factory to carrying out operations.
f).

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 Uncertainty and Risk
▪ Term uncertainty is often used in connection with the term risk (sometimes even
interchangeably.
▪ Uncertainty refers to a state of mind characterized by doubt, based on a lack of knowledge
about what will or will not happen in the future.
▪ Uncertainty falls into two broad categories:
a)Those for which the probability of occurrence is calculable.
b) Those to which such measurement is not possible either because their occurrence follows
no discernable pattern or because they are unique events.
▪ Professor Frank Knight called the first group risks, whereas the latter he described as the true
uncertainties.
▪ Hence the primary distinction between risk and uncertainty is that in risks the probability of
loss can be analyzed and determined but not for uncertainties.
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 How risk is created
1. Activities: Commercial, Constructional, Financial,
Manufacturing, Professional, Political or Scientific
2. Relationship to people or property
3. Laws and regulations
4. Environmental, physical, social, political situation.
Risks result in injury or loss for a number of reasons and often in combination:
1.Lack of awareness i.e. failure to recognize possibility or circumstances of Risk,
2.Lack of capability i.e. lack of knowledge / skill / competence,
3.Lack of motivation i.e. indifference or refusal to deal with a risk problem.
The vast majority of losses involve one or more of these factors.
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 1. Uncertainty in enterprise

• The extent of the uncertainties to which all sections of

society are exposed can be seen in following few
examples:
1. Individuals
• Individuals and families are exposed to the chances of
loss due to disease, accidental injury and death,
unemployment, loss of possessions due to many perils,
liability for injury caused to others, and many other
events which may diminish their welfare.
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 2. Growing Complexity in Business Environment

•Players in the general insurance business are likely to be exposed to

varieties of financial and non-financial risks like
a)Capital risk.
b)Enterprise risk.
c)Asset liability management risk.
d)Insurance risk.
e)Operating risk
f)Credit risk arising out of the nature of business
g) The socio economic environment in which they operate.
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 Financial Risks
• Insurance business basically being financial business in nature attracts
financial risks in the forms of
• Capital (in)adequacy risk.
• Asset/ Liability management risk (Exchange rate risk. Interest rate risk.
Investment risk.)
• Insurance risk (Underwriting risk, Catastrophic risk, Reserve risk ,Pricing risk,
Claims management Risk )
• Credit risk( Reinsurance risk, Policy holders risk, Brokers risk, Claims recovery
risk, Other debtors risk)

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• Capital (in)adequacy risk : Capital is one of the keys to the
workings of the insurance business.
• It is capital that allows insurers to underwrite risks.
• It is capital that gives policyholders a window on the
sustainability of the protection they have sought.
• It is capital that gives a hint to the employees about the
financial shape of their employer.
Therefor Capital functions as a basic commodity that must be
optimally exploited. Capital affect the solvency margin of the
company
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• Asset/ Liability management risk (Exchange rate risk. Interest rate
risk. Investment risk.)
• Exchange rate risk: It is caused by fluctuations in the investor’s local
currency compared to the foreign-investment currency. Exchange
rate risk can’t be completely avoidable but it can be mitigated.
• Interest rate risk: If interest rates rise, for instance, the value of a
bond or other fixed-income investment in the secondary market will
decline.
• Investment risk : Investment risk can be defined as the probability or
likelihood of occurrence of losses relative to the expected return on
any particular investment.
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Insurance risk (Underwriting risk, Catastrophic risk, Reserve risk
,Pricing risk, Claims management Risk )
• Underwriting risk:. In insurance, underwriting risk may arise from
an inaccurate assessment of the risks associated with writing an
insurance policy or from uncontrollable factors. As a result, the
insurer's costs may significantly exceed earned premiums.
• Catastrophic risk: This risk is one where a large number of people
are exposed to the risk of a large loss by reason of the occurrence
of a peril. It could be a natural calamity in the form of
earthquakes, floods, draughts or even terrorism attack resulting
in loss of life, destruction of infrastructure on a large scale.
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• Reserve Risk: The term ‘Reserve’ is defined by the amount
of money earmarked for a specific purpose ensuring future
payments.
• The reserves are set aside by the insurer for its liabilities
(net of reinsurance and other recoveries for those liabilities)
will be inadequate to meet the net amount payable when
the insurance liabilities crystallize.
• The regulatory body of the government often checks on the
reserve to ensure that policyholders will actually be covered
according to the risks that they have insured.
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• Pricing risk : Rate is the price per Unit of Insurance. Pricing
insurance risks is a complicated process that relies on
historical data and future forecasting.
• Claims management : To manage claims in insurance
involves the systematic process of handling and resolving
insurance claims made by policyholders.
• It is a critical function in the insurance industry,
encompassing everything from the initial claim filing to the
final settlement or denial.
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• Claims management in the insurance industry plays a
pivotal role in upholding the trust and credibility of
insurance companies.
• When policyholders face a loss or damage, they rely on the
insurer to fulfill their promise promptly and fairly.
• It serves as the bridge between policyholders' needs and
insurers' responsibilities.

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 Non-Financial Risks

• (i) Operational risk.

• (ii) Industry’s increasing reliance on sophisticated
financial technology with the latter’s associated
probability of failure at times.
• (iii) Ever increasing pace of changes in the deregulated
insurance regime
• (iv) The globalization process paving the way for the
entry of global players.
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• 1. Operational risk : Operational risk is nothing but the
uncertainties and hazards a company faces when it performs
its day-to-day business activities.
• Operational risk is usually caused by four different avenues:
people, processes, systems, or external events.
• Companies try to mitigate the risk within each category as
best as possible but with the understanding that some
operational risk will likely always be present.
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• People: Work force deficiencies or employee shortages. For example, a
Insurance company may not have staff that has the knowledge needed to tackle
a specific task e.g. underwriting ,accounts, claims etc.
• To mitigate these types of risks, companies hire new people who have
experience in handling particular department. Later training staff, and ensuring
employee retention remains high.
• As each of these aspects is resource and time-intensive, operational risks
caused by people are heavily tied to financial repercussions.
• Employees conspiring and often colluding to overtake internal controls and
misappropriate company resources.

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• Processes: Every company has its own processes and
insurance is not exception to it. If the process is not employee
or customer friendly then it will affect the output.
• Companies that have high premium turnover may not have
fully built out their processes or documented all steps.
• In addition, some processes are also at risk of being taken
advantage of through collusion and failed internal controls to
put the company at risk of losing money through theft/fraud.

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• Systems: Almost all Companies more and more are relying
on software and systems to operate their business.
Operational risk includes the chance that these systems are
outdated, inadequate, or not properly updated .
• There are also performance considerations, as operational
risk includes the chance that one company's systems are not
as efficient as that of the competitor's.
• There are operational risks relating to the technical aspects
of a system. Systems may have bugs or technical deficiencies
leading to more exposure to cyber crimes.
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• Systems also have capacity constraints, and a
company may be increasing its risk by putting to
heavy of a load of expectations on what their
systems can do.
• Deficiencies in computer systems, hardware,
software, or the interaction between any of their
components.
• Operational activities that harm customers, mislead
information, incite negligence.
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External Events: In many cases, operational risk occurs from outside
the company.
• This can be anything from natural disasters to non compliance of the
Govt. Regulations, Political changes that restrict how the company
can operate.
• Some of these types of risk may be classified on their own (i.e.
geopolitical risk).
• Others are simply a nature of business such as a third-party
defaulting on a contract agreement.
• Independent parties outside of the company attempting to bribe,
thieve, forge, or cyberattack.
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• 2.Increasing reliance on sophisticated financial technology : Insurance industry
built on trust and risk management, the infusion of FinTech/Insurtech solutions
brings about a fundamental shift in how insurance products and services are
designed, delivered, and experienced.
By use of advanced technologies such as:
• Artificial intelligence
• Machine learning
• Blockchain
• Mobile applications
• Internet of Things (IoT)
• Data Analysis
• Insurers can reimagine their operations and offer personalized, efficient, and
transparent services like never before.
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• Traditional insurance processes, often marked by complexity
and inefficiency, are being streamlined and automated,
leading to faster and more accurate underwriting, claims
processing, and policy management.
• In FinTech sector for insurance digital platforms enabling
seamless communication between customers, and insurance
agents.
• These platforms provide an integrated and user-friendly
interface, allowing users to conveniently obtain quotes,
purchase policies, manage their portfolios from their devices,
assess risks, process claims, and monitor policy performance.
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 Artificial Intelligence and Machine learning
• Insurance industry is one of the most data-intensive
industry i.e. customer data, claims data, and other
information, artificial intelligence streamline their
processes and provide better customer service.
• Some of the common function of AI/ ML are
underwriting, claims processing, fraud detection,
among other things
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 1.Underwriting
• Underwriting is a core activity of the insurance industry, and
AI can help insurers make more accurate underwriting
decisions.
• AI insurance powered underwriting can identify risk factors
and predict future claims by analyzing vast amounts of data,
including customer data, claims history, and other
information.
• With more accurate underwriting, insurers can price policies
more accurately, reducing the risk of financial losses due to
underpriced policies.

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 2. Claims Processing
We know that Claims processing is a time-consuming and costly
process for insurers.

AI can process, claim data, document scanning, and damage

assessment. The claims can be processed faster and more
accurately, reducing the time and cost of claims processing for
insurers.

Additionally, AI Insurance claims processing can help insurers

identify fraudulent claims, reducing the likelihood of financial
losses.
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 3.Customer Experience
• Like other industries, insurance industry is also highly competitive.
• Providing an excellent customer experience is essential for retaining
customers.
• AI-powered assistance can provide 24/7 customer support, answering
customer inquiries and guiding them through the claims process.
• Using natural language processing, they can understand and respond to
customer queries accurately, providing a seamless customer experience.
• AI for insurance can also analyze customer feedback and identify areas for
improvement, enabling insurers to enhance their customer experience
continuously.

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 4. Risk Management

• Risk management is essential in the insurance industry, and

AI can help insurers identify and manage risks more
effectively.
• AI can analyze data from various sources, including weather
forecasts, traffic data, and social media, to identify
potential hazards and predict their impact.
• With more accurate risk management, insurers can make
informed policy pricing and claims management decisions,
reducing the likelihood of financial losses.
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• Predictive maintenance is predicting equipment failures before they
occur, enabling maintenance teams to perform maintenance tasks
proactively.
• In the insurance industry, predictive maintenance can reduce the risk
of claims due to equipment failure.
• AI-powered algorithms can analyze equipment data, including usage
patterns and performance metrics, to identify potential failures
before they occur.
• By predicting equipment failures and performing maintenance
proactively, insurers can reduce the risk of claims due to equipment
failure, reducing the likelihood of financial losses.
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 5.Fraud Detection
• Fraud is a big problem in the insurance industry, and it can result in
significant financial losses.
• Artificial Intelligence-powered fraud detection algorithms can analyze vast
amounts of data from various sources, including social media, other
insurance companies to identify patterns that may indicate fraud.
• Insurers can quickly detect fraudulent activities and take appropriate action
using machine learning algorithms.
• Machine learning in insurance can also help prevent fraud by identifying
suspicious activities before they become a claim.
• Using AI for fraud detection has enabled insurers to save losses due to
fraudulent claims.
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3.Challenges in deregulated insurance regime:
a)Lack of consumer awareness: Even after
opening of insurance sector the penetration and
density is low because product awareness and its
benefits is low.
b) Negative consumer experience and perception:
The common perception is that the system is
slow, unreliable and even harassing the customer.
c)Agency force: With reduced commission
structure, attrition is more.
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•Thanks

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