Page 21 - Insurance Times JUNE 2022

great extent also to Reinsurance Technical Risks or
Reinsurance Risks faced by Reinsurers.

Insurance Risks are basically inherited through direct
insurance business, inward coinsurance business and inward
reinsurance business of an insurer as reduced by risks ceded
through outward coinsurance business, outward reinsurance
business and other means. Similarly, Reinsurance Risks are
basically inherited through inward reinsurance business of a
reinsurer as reduced by risks ceded through outward
retrocession business and other means.

Insurance Technical Risks Analysis
The insurance business is all about risk - understanding it,
Insurance Risk Reduction: Insurers reduce insurance
minimizing it, pricing to compensate for it.
risks accepted, through various mechanisms such as
Insurance risk analysis methods are mentioned policy deductibles, co-pay, exclusions, warranties, terms,
below: conditions, no claim bonus, other rewards to the insured
Insurance risk factor profiling for good claims history, requirement of material changes
to be intimated, working with the insured to mitigate
Insurance predictive modelling
risk, working with loss prevention associations, working
insurance risk modelling
with governmental agencies, creating awareness among
Insurance scoring
policyholders, and so on.
Insurance risk-level classification
Insurance Risk Pooling: Insurers participate in pools
within the country such as Indian Market Terrorism Risk
Insurance Technical Risks Management
Insurance Pool, Indian Nuclear Insurance Pool and Motor
Presently, insurers manage insurance risks through Third Party Insurance Pool (the last mentioned has now
the seven methods mentioned earlier. More been disbanded). Pooling may also be regional or global.
particularly:
Insurance Risk Combination: Insurers may combine a
Insurance Risk Avoidance: Insurers may avoid accepting large number of small or medium, widely dispersed
certain specific risks, certain sub-lines or lines of business insurance risks in the same sub-line or line of business in
altogether, or business in certain geographies or
their portfolio instead of a few large insurance risks. Such
hazardous locations.
a combination may be relatively more feasible to retain
Insurance Risk Retention: Insurers may retain certain to a larger extent. Also, they may opt for an ideal mix of
insurance risks either deliberately, through inadvertence insurance risks among various sub-lines and lines of
or due to market conditions. In the first case, insurers business, so that adverse results in one may be offset by
may retain certain insurance risks found more profitable favourable results in others in a particular year. Further,
to retain, or as per the retention obligations imposed by they may combine good insurance risks (few available),
the reinsurance arrangements, or which are not covered average insurance risks (relatively more available) and
under the existing coinsurance or reinsurance poor insurance risks (the largest number available) in
arrangements and facultative cover is either not available such a way that the first category is fully retained, the
or available at unacceptable rates or terms and second category is partially retained and the last category
conditions. is fully transferred.
In the second case, insurance risk retention may be forced Insurance Risk Hedging: Insurers hedge insurance risks
by inadvertently failing to make other arrangements so through the operation of the Law of Large Numbers. As
that the insurer is (so to say) 'left holding the baby'. the number of risks increases in a portfolio, the number
In the third case, market conditions may be adverse such of losses also increase, but less than proportionately. If
that other arrangements can be made only at one out of ten factories insured reports a fire loss, it does
uneconomical rates or unfavourable terms and not mean that ten out of hundred or hundred out of a
conditions. Hence, insurance risk is unwillingly retained. thousand factories insured will report fire losses. So the
The Insurance Times, June 2022 21