Page 22 - Insurance Times JUNE 2022

insurance risk is hedged, not by taking a contrary position, reinsurer, rarely is the investment department consulted to
but by offsetting it through a far larger number of similar calculate the opportunity cost of the investment income lost
risks. (on the premium ceded less the reinsurance commission and
profit commission earned) vis-à-vis the claims likely to be paid
Insurance Risk Transfer including Coinsurance and
out on the risk proposed to be ceded, if not ceded. That
Reinsurance: How an insurer shifts back a certain portion
decision is taken in isolation, leading to less than optimum
of insurance risks to the insured has been discussed under
return on capital employed on insurance technical risk
"Insurance Risk Reduction". An insurer can transfer the
management.
insurance risk to third parties under the Principle of
Subrogation. An insurer may share the insurance risk
Similarly, investment decisions are considered to be too
with other insurers through the mechanism of
confidential, sacrosanct and unintelligible for the uninitiated
Coinsurance. Finally, the residual insurance risk may be
to be discussed with the likes of personnel of 'less informed'
transferred through Reinsurance arrangements.
departments. Those decisions, too, are taken with utmost
Insurers also manage insurance risks through secrecy, leading to lack of coordination, avoidable retractions
and, ultimately, less than optimum ROCE on ITRM, not to
techniques including but not limited to:
mention undoing all the good work done by sound
Prudent selection of lines of business, geographies, etc.
underwriting. Events of year 2008 have given cause enough
Deployment of astute business processes, competent
to cast serious aspersions on the so-called financial
personnel and appropriate software management expertise of investment experts.
Prudent selection from business offered
Executive Summary
Sound underwriting including rating, terms, conditions,
exclusions and warranties For insurers, risk can contain valuable upside, if managed
effectively. An insurer that understands how risk might impact
Guarding against risk accumulation hazards and
its Key Performance Indicators (KPIs) can move more
catastrophe hazards
effectively to seize opportunities and drive business
Guarding against moral hazards including insurance fraud
performance.
Claims investigation, salvage, subrogation, legal
remedies, etc. The strategies that insurers develop for financing risk are an
important part of this process. By simply reinsuring, insurers
Control over expenses of administration and settlement
probably miss an opportunity to extract better value from
Building up of technical and other reserves
their capital. Sub-optimal decisions on financing risk can
Optimizing investment income to supplement impact Key Financial Indicators (KFIs) and erode margins.
underwriting profits or to offset underwriting losses
Investment trend for insurers has to move towards managing
Coinsurance and reinsurance
risk rather than buying more reinsurance - taking greater
Alternative Risk Transfer (ART) including Special Purpose
control over their risk-related costs. By better managing their
Vehicles (SPVs)

The Problem
Insurance Risk Management is already a few centuries old. Is
it then not refined enough?

The root cause of the problem lies not only in the
departmentalization of insurance companies but also in the
understandably differing mindsets of marketing,
underwriting, claims, reinsurance and investment personnel
and in the ingrained mentality of personal fiefdoms of key
executives.

For instance, when a decision is taken to cede business to a

22 The Insurance Times, June 2022