In today’s economic environment, an insurers’ ability to manage risk is emerging as a key driver of its ability to grow profitably.

All too often, insurers see risk management as something they need to do to satisfy regulators. This is a mistake, because risk management actually lies at the heart of high performance in life insurance today and in the future.

A number of factors underlie the importance of managing risk—among them a prolonged period of low interest rates combined with unprecedented economic volatility, the increased frequency of catastrophic events and ongoing regulatory initiatives (given new impetus in the wake of the 2008 financial crisis). Consequently, managing capital has become a crucial skill, and so the chief risk officer has become part of the executive leadership team.

As part of this evolution, risk management has progressed from being seen purely as part of compliance with the growing number of regulatory regimes to being seen as a generator of value.

To my mind, this is an important development. There seems little doubt that the integration of risk management principles and ways of thinking has a positive effect on the general quality of the decisions that are made. By helping the company to manage its capital better (not just complying with Solvency II and other regulations pertaining to capital), and generally to mitigate its risks better, the disciplines of risk management improve overall performance and, most important of all, profitability.

Consider, for example, the impact on profitability of using real-time information to make underwriting more accurate.

As a result, there is a distinct trend across the life insurance industry for risk management to be integrated into the firm’s core processes. This means developing products that are less capital-intensive, with less emphasis on minimum interest-rate guarantees and more on returns linked to the performance of indexes or unit trusts. Another corollary is the repricing of products to take better account of the cost of capital.

At a practical level, consider the impact on profitability.

Risk management also often leads to the adjustment of the company’s portfolio mix, leading to greater diversification, so that longevity and mortality rates are negatively correlated.

At a more systemic level, there’s also a greater emphasis on mitigating risk via reinsurance, hedging the financial risk of life products and so on. Life insurers are also devoting time and energy to managing their assets better.

In the end, therefore, smart life insurers with their eyes on how to drive profitable growth are not wasting the large investments they have made in achieving regulatory compliance. Rather, they are using them as the foundation blocks for a risk-adjusted operating model, a transformation that helps drive down costs and generate value. This is a journey that is being executed at several levels, and perhaps I’ll return to it in more detail in a later blog—let me know if you would be interested.

2 responses:

  1. Great post about the importance of risk management for insurers. I’d say that everything you write is also true for P&C insurers and direct companies in particular where UW and risk selection aren’t mediated by expert agents. I support your vision that real time data will improve in the near future with the assumption that process and, obviously, risk managers have to be part of the game.

  2. Thanks, Damiano. I suppose you are right that integrating risk management based is equally important for P&C and direct insurers. I was particularly struck by your insight about the increased importance of data to help make informed underwriting and risk selection when there is no expert human (i.e. an agent) to bring his or her experience and knowledge to bear.

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