Page 24 - The Insurance Times November 2025

premium rates, and second, a reputational risk that 4.0 Core Risk Category: Operational &
could, in extreme cases, make it difficult to place
reinsurance coverage in the future. Enterprise Risks
Operational risks are defined as the risk of loss resulting from
3.2 Lapse and Withdrawal Risk inadequate or failed internal processes, people, and systems,
or from external events. Alongside these are critical
Lapse Risk is the adverse financial impact that occurs when
enterprise-level risks, such as regulatory and reputational
the actual rate of policy lapses is higher than the rate
anticipated during pricing. High lapse rates can erode challenges, which can have wide-ranging strategic
profitability in several ways: consequences for the entire organization. These risks are
1. Increased Per-Policy Expense: A significant portion of not tied to underwriting or market fluctuations but to the
an insurer's expenses are fixed. When policies lapse, very fabric of how the company operates and is perceived.
these fixed costs must be spread over a smaller in-force The following sections detail these crucial risk categories.
policy base, driving up the per-policy expense.
4.1 Operational Risk
2. Non-Recovery of Initial Costs: Insurers incur high
upfront costs, including commissions and underwriting Operational risk management follows a model where a
expenses, when issuing a new policy. These costs are cause leads to an event, which in turn leads to a
expected to be recouped over the life of the policy. High consequence. The cause is the underlying failure, the event
lapse rates, particularly in the early years, prevent the is the operational failure itself, and the consequence is the
full recovery of these initial expenses. resulting loss, which can be financial, reputational, or
customer-related. The severity of the loss is measured by
3. Reduced Company Value: A high lapse rate erodes the its likelihood and its potential impact.
future profit stream from the in-force book of business,
thereby reducing the company's overall value, a The framework for categorizing and understanding
measure known as its embedded value. operational risks is summarized below. Events are classified
4. Adverse Selection: Lapses are often driven by healthy into seven primary categories, which include the following:
policyholders who no longer perceive a need for
coverage. This leaves a remaining portfolio with a Component Description
higher concentration of poorer-quality lives, which in Cause The building block of the risk: the
turn increases the company's future mortality risk. inadequate or failed process, person, or
system that leads to an operational risk
3.3 Expense Risk event.
Expense Risk is the risk that the actual expenses incurred in Event The manifestation of the risk. Events
running the business exceed the expense assumptions that include: 1. Internal Fraud 2. External
were loaded into the premium at the time of pricing. This is Fraud 3. Execution, Delivery, and
a particular challenge for new companies, which often Process Management 4. Client,
experience "expense overrun." Products, and Business Practices 5.
Accident and Natural Disaster 6.
During the initial years of operation, actual expenses are System Failures 7. Employment practice
very high. However, to remain competitive, a new company and workplace safety.
cannot charge these high costs directly to customers. Consequence The resulting loss which can be financial
Instead, a lower, more sustainable expense level is loaded (e.g., fines, remediation costs),
into the premium. The excess of initial expenses is intended reputational (damage to brand trust),
to be recovered in later years. The timeframe for this or customer-related (impacting new
recovery is known as the "expense breakeven period," which business). Loss is measured by likelihood
for a life insurance company is typically estimated to be and impact.
between 6 to 8 years.
4.2 Regulatory Risk
From the core business risks of insurance, we now broaden Regulatory Risk refers to the costs and challenges arising
our scope to risks arising from the wider operational and from new or modified laws and regulations. The insurance
enterprise environment. industry operates in a highly regulated environment, and

22 November 2025 The Insurance Times